Choosing the Right Valuation Metric#

No single valuation metric works for every situation. Successful investors match their valuation approach to the specific characteristics of each company and industry.

The best valuation analysis uses multiple metrics together, but knowing which metrics to prioritize for each situation dramatically improves your investment decisions.

Decision Framework by Company Type#

Profitable, Mature Companies#

For stable, profitable businesses with predictable earnings:

Primary Metrics	Why They Work
P/E Ratio	Earnings are stable and meaningful
EV/EBITDA	Controls for capital structure
FCF Yield	Shows true cash returns
Dividend Yield	If dividends are relevant

Examples: Johnson & Johnson, Procter & Gamble, Coca-Cola

High-Growth Companies#

For rapidly growing businesses, often reinvesting all profits:

Primary Metrics	Why They Work
P/S or EV/Revenue	Revenue exists even without profits
PEG Ratio	Adjusts for growth rate
Forward P/E	Values future, not past
EV/EBITDA	If EBITDA-positive

Examples: Salesforce, Shopify, emerging tech companies

Unprofitable Growth Companies#

For pre-profit companies investing heavily in growth:

Primary Metrics	Why They Work
EV/Revenue	Only metric that's meaningful
Rule of 40	Growth + Margin threshold
Customer metrics	LTV/CAC, retention rates
Gross margin	Indicates unit economics

Examples: Early-stage SaaS, biotech, disruptive startups

Asset-Heavy Companies#

For businesses where physical assets drive value:

Primary Metrics	Why They Work
P/B Ratio	Assets are central to value
EV/EBITDA	Accounts for debt on assets
P/NAV	Net asset value for REITs
P/E	If earnings are stable

Examples: Banks, REITs, utilities, manufacturing

Cyclical Companies#

For businesses with earnings that swing with economic cycles:

Primary Metrics	Why They Work
P/S	Revenue more stable than earnings
Normalized P/E	Average earnings across cycle
P/B	Asset value persists through cycles
EV/EBITDA	At mid-cycle levels

Examples: Auto manufacturers, steel, airlines, homebuilders

Cyclical Trap

Cyclical companies look cheapest (low P/E) at cycle peaks when earnings are highest. They look most expensive (high P/E) at troughs when earnings are depressed. Don't be fooled by the P/E signal.

Industry-Specific Valuation Norms#

Technology and Software#

Metric	Typical Range	Notes
EV/Revenue	5-15x	Higher for faster growth
P/S	5-20x	SaaS commands premiums
Forward P/E	25-50x	Growth expectations high
Rule of 40	Target: >40%	Growth Rate + Margin

Financial Services#

Metric	Typical Range	Notes
P/B	0.8-2.0x	Core metric for banks
P/E	8-15x	Lower than market average
ROE	Compare to P/B	High ROE justifies high P/B
Dividend Yield	2-4%	Important for income

Healthcare#

Metric	Typical Range	Notes
P/E	15-30x	Varies widely by sub-sector
EV/Revenue	3-8x	Biotech can be higher
Pipeline value	DCF models	For drug developers
P/S	Varies	For pre-revenue biotech

Consumer and Retail#

Metric	Typical Range	Notes
P/E	12-25x	Brand strength matters
EV/EBITDA	6-12x	Controls for leases
Same-store sales	Growth metric	Key operational KPI
P/FCF	15-25x	Cash generation focus

Energy#

Metric	Typical Range	Notes
EV/EBITDA	4-8x	Commodity exposure
P/CF	3-8x	Cash flow focus
Reserve value	$/BOE	Oil & gas specific
Dividend Yield	3-6%	Income component

Growth vs. Value Investing Metrics#

Value Investor's Toolkit#

Value investors seek stocks trading below intrinsic value:

Metric	Target	Rationale
P/E	< 15x	Below market average
P/B	< 1.5x	Near asset value
FCF Yield	> 6%	Strong cash returns
Dividend Yield	> 3%	Income component
PEG	< 1.0	Cheap for growth rate

Growth Investor's Toolkit#

Growth investors pay premiums for exceptional growth:

Metric	Consideration	Rationale
Forward P/E	vs. Growth rate	PEG still matters
Revenue Growth	> 20%	High growth expectation
EV/Revenue	Relative to growth	Higher for faster growers
TAM	Large market opportunity	Room to grow
Margins Trajectory	Improving	Path to profitability

GARP Approach

Growth at a Reasonable Price (GARP) combines both: seek growth stocks with PEG ratios below 1.5 and reasonable forward P/E relative to growth.

Building a Multi-Metric Approach#

The Triangulation Method#

Never rely on a single metric. Use at least three from different categories:

Earnings-based: P/E or EV/EBITDA
Cash flow-based: P/FCF or FCF Yield
Asset or Revenue-based: P/B, P/S, or EV/Revenue

Example: Analyzing Microsoft#

Metric	Value	Assessment
Forward P/E	32x	Premium, but justified by quality
EV/EBITDA	24x	High for tech sector
P/FCF	38x	Expensive but consistent FCF
FCF Yield	2.6%	Low, needs growth to justify
P/S	12x	Premium for margins

Conclusion: Trading at a premium across all metrics, justified by dominant market position, recurring revenue, and consistent execution.

Creating a Valuation Scorecard#

For systematic analysis, score each metric:

Metric	Value	vs. Sector	vs. History	Score
P/E	18x	Inline	Below 5-yr avg	+1
EV/EBITDA	12x	Premium	Inline	0
P/FCF	22x	Cheap	Above avg	0
FCF Yield	4.5%	High	Inline	+1
Total				+2

Positive scores suggest undervaluation; negative scores suggest overvaluation.

Common Valuation Mistakes to Avoid#

Mistake	Why It's Wrong	Better Approach
Using P/E for unprofitable companies	Produces meaningless result	Use P/S or EV/Revenue
Ignoring industry context	Different sectors have different norms	Compare within sector
Single-metric decisions	One ratio never tells complete story	Use multiple metrics
Ignoring growth for P/E	Low P/E may reflect low growth	Check PEG ratio
Forgetting quality	Cheap can mean low quality	Assess fundamentals

Key Takeaways

Match valuation metrics to company type: P/E for mature, P/S for growth, P/B for asset-heavy
Industry norms vary widely: Tech (20-40x P/E) vs. Banks (10-15x) vs. Energy (5-10x)
Value investors prioritize P/E < 15, FCF Yield > 6%, P/B < 1.5
Growth investors focus on forward metrics and growth-adjusted ratios like PEG
Use triangulation: combine earnings-based, cash flow-based, and asset/revenue-based metrics
Create valuation scorecards for systematic comparison across multiple metrics