I am curious about valuation, since different people use different valuation metrics like EV/FCF, P/S, PE, Forward PE, and so on... Sometimes even using few valuation metrics at the same time.
How do you decide which one to use and all these calculations... wasn't investing to be comprehendible and not to get lost in those numbers?
Thanks for reading and sharing your thoughts here in a comment.
There's probably few topics that spark more hot debates than valuation and it can be very complicated, or very simple.
What likely won't work, is juts buying the cheapest biz - likely, it's going to turn out as a value trap. At the same time, investing at peak valuation can set one's gains back for a certain amount of time.
What we do is basically look at the valuation of a company within the context of its own historical valuation and in context to the development of the other fundamentals. If the business is doing fundamentally well, but trades for a lower valuation, it is a signal this could be a nice entry point. However, if the biz is trading historically low, but its overall fundamentals are also deteriorating without any proper company-related reason (like interest hikes), then a low valuation is rather a warning signal than a buying signal.
In terms of which valuation to use, it depends on the type of company. Companies, that are not yet profitable on a GAAP-basis have no "earnings", and therefore, we cannot calculate P/E. For these type of business, EV/S (Enterprise value/sales) is suitable. Businesses with earnings have more options to use, ranging from P/E, P/FCF, P/OFC, P/EBIT(D)A or EV/ABIT(D)A. There are probably more.
A simple way to find out which one you want to use is to check what the company itself is optimizing for. Some acquiring businesses e.g. focus on EBITA and then it makes sense to use EV/EBITA, for instance. Retail businesses like Amazon can be valued using operating cashflow, so P/OCF.
Generally, valuation is highly subjective and I think it helps to use it as a tool to think about an investment and gauge if it has an attractive entry point, but I would also no like to use it as the sole guiding principle in valuation.
Hi Lisa,
Thank you and Moritz for your thoughts.
I am curious about valuation, since different people use different valuation metrics like EV/FCF, P/S, PE, Forward PE, and so on... Sometimes even using few valuation metrics at the same time.
How do you decide which one to use and all these calculations... wasn't investing to be comprehendible and not to get lost in those numbers?
Thanks,
Martin
Hi Martin,
Thanks for reading and sharing your thoughts here in a comment.
There's probably few topics that spark more hot debates than valuation and it can be very complicated, or very simple.
What likely won't work, is juts buying the cheapest biz - likely, it's going to turn out as a value trap. At the same time, investing at peak valuation can set one's gains back for a certain amount of time.
What we do is basically look at the valuation of a company within the context of its own historical valuation and in context to the development of the other fundamentals. If the business is doing fundamentally well, but trades for a lower valuation, it is a signal this could be a nice entry point. However, if the biz is trading historically low, but its overall fundamentals are also deteriorating without any proper company-related reason (like interest hikes), then a low valuation is rather a warning signal than a buying signal.
In terms of which valuation to use, it depends on the type of company. Companies, that are not yet profitable on a GAAP-basis have no "earnings", and therefore, we cannot calculate P/E. For these type of business, EV/S (Enterprise value/sales) is suitable. Businesses with earnings have more options to use, ranging from P/E, P/FCF, P/OFC, P/EBIT(D)A or EV/ABIT(D)A. There are probably more.
A simple way to find out which one you want to use is to check what the company itself is optimizing for. Some acquiring businesses e.g. focus on EBITA and then it makes sense to use EV/EBITA, for instance. Retail businesses like Amazon can be valued using operating cashflow, so P/OCF.
Generally, valuation is highly subjective and I think it helps to use it as a tool to think about an investment and gauge if it has an attractive entry point, but I would also no like to use it as the sole guiding principle in valuation.
I hope that helps! :)