What Does It Mean to Value a Stock?
When most investors see a stock’s price, they think: “That’s cheap!” or “That stock is so expensive.
But here’s the thing: In the investing world, a stock’s price does NOT equal value.
Think about it this way. You might pay $100 for a stock. But is that stock actually worth $100? Is it worth more? Is it worth less?
That's the million-dollar question. Literally.
Stock valuation is the process of figuring out what a company is truly worth. Then you compare that to what the stock currently costs.
If the stock price is lower than its real value, you might have found a deal. If the price is higher than its value, you might be overpaying.
Warren Buffett said it best: "Price is what you pay. Value is what you get."
The goal? Buy stocks for less than they're worth. Hold them. Then sell when the market finally recognizes their true value.
Today, we’re going to break down the 7 best stock valuation methods that you can use to value any stock in 2026.
We’re going to show you real examples on how to use each, why you need valuations in the first place, and more important info you need to know as an active investor.
Keep reading to learn how to put these valuation methods to work with real potential stock investing opportunities.
Why You Need Multiple Valuation Methods
No single method tells you everything about a stock.
Different methods work better for different types of companies:
- Some methods only work for profitable companies.
- Others help you value companies that aren't making money yet.
- Some are great for comparing competitors in the same industry.
- Others help you value a company’s assets, market position, and growth rate.
But all of these help you do one important thing: Determine if a stock is undervalued or overvalued.
Of course, ‘value’ is relative based on the data you’re looking at - we’ll explain what that means later on.
Keep in mind: There are certain valuation methods that some investors love. There’s others that investors avoid.
In the end, there is no one single valuation method. We’re breaking down the 7 most common below.
However, there are hundreds of different ways to value a stock.
Professional investors use several methods together. They look at the full picture before making a decision.
Let's break down the 7 most important valuation methods you need to know.
Method 1: Price-to-Earnings (P/E) Ratio
What It Is
The P/E ratio shows you how much investors are willing to pay for every dollar a company earns in profit.
How To Find It
Formula: Stock Price ÷ Earnings Per Share (EPS)
To find EPS, take the company's net income and divide it by total shares outstanding.
Real Example: Disney
Let's calculate Disney's P/E ratio using real numbers.
Note: All numbers used are calculated from data found in December 2025. These numbers are likely out of data and are being used for education purposes only.
Step 1: Find Disney's stock price
- Stock price: $110 per share (we'll round for simplicity)
Step 2: Find earnings per share
- Net income: $4.972 billion.
- Shares outstanding: 1.81 billion.
- EPS = $4.972 billion ÷ 1.81 billion = $2.75 per share.
Step 3: Calculate P/E ratio
- P/E = $110 ÷ $2.75 = 40
What This Means
Disney's P/E ratio of 40 means investors pay $40 for every $1 of profit Disney earns.
Is that good or bad? It depends on context.
Warren Buffett's rule: He typically looks for P/E ratios between 15 and 30. Why? At those levels, you're paying a reasonable price for the earnings.
| P/E Ratio Range | What It Might Mean |
| Under 15 | Potentially undervalued (or company has problems) |
| 15-30 | Reasonable valuation range |
| Over 30 | Potentially overvalued (or high growth expected) |
Disney's P/E of 40 is on the higher side. This suggests the market expects Disney to grow significantly. Or investors are willing to pay extra for Disney's strong brand.
When to Use P/E Ratio
Best for:
- Comparing companies in the same industry.
- Evaluating mature, profitable companies.
- Quick valuation checks.
Don't use for:
- Unprofitable companies (they have no earnings).
- Companies with temporary losses.
- Fast-growing startups.
Method 2: Price-to-Sales (P/S) Ratio
What It Is
The P/S ratio compares a company's stock price to its revenue (sales).
This method works even when a company isn't making profits yet.
How To Find It
Formula: Stock Price ÷ Revenue Per Share
Or: Market Cap ÷ Total Revenue
Real Example: Snap
Let's value Snap using the P/S ratio.
Note: All numbers used are calculated from data found in December 2025. These numbers are likely out of data and are being used for education purposes only.
Step 1: Find the stock price
- Snap stock: $8.
Step 2: Find total revenue
- Total revenue: $1.5 billion (rounded).
Step 3: Calculate P/S ratio
- We need revenue per share.
- Revenue per share = 0.88.
- P/S = $8 ÷ 0.88 = 9.09 (rounded).
What This Means
Investors pay $9.09 for every $1 of sales Snap generates.
A P/S ratio under 1.0 often signals an undervalued stock. Above 2.0 might mean overvaluation. But this varies by industry.
When to Use P/S Ratio
Best for:
- Unprofitable companies with strong revenue growth.
- Comparing companies in the same industry.
- Tech startups and growth companies.
Remember: A company can have great sales but terrible profits. P/S ratio doesn't show profitability.
Method 3: Price-to-Book (P/B) Ratio
What It Is
The P/B ratio compares stock price to book value.
Book value = what shareholders would get if the company sold everything and paid all debts.
How To Find It
Formula: Stock Price ÷ Book Value Per Share
To find book value per share, take total shareholder equity and divide by shares outstanding.
Real Example: Pfizer
Let's calculate Pfizer's P/B ratio.
Note: All numbers used are calculated from data found in December 2025. These numbers are likely out of data and are being used for education purposes only.
Step 1: Find stock price
- Pfizer: $23.32 per share.
Step 2: Find book value
- Shareholder equity: $88.2 billion.
- Shares outstanding: 5.67 billion.
- Book value per share = $88.2 billion ÷ 5.67 billion = $15.55.
Step 3: Calculate P/B ratio
- P/B = $23.32 ÷ $15.55 = 1.49.
What This Means
Investors pay $1.50 for every $1.00 in assets Pfizer has on its balance sheet.
| P/B Ratio | Meaning |
| Below 1.0 | Potentially undervalued (you're paying less than book value) |
| Equal to 1.0 | Fairly valued |
| Above 1.0 | Market values intangibles like brand, patents, or growth |
Pfizer's P/B of 1.49 is moderate. The market sees value beyond just physical assets - things like drug patents, brand recognition, and research capabilities.
Warren Buffett and Book Value
Book value is one of Warren Buffett's favorite metrics. He looks for companies trading below their book value.
Famous example: Other investors have used book value successfully as well.
In the 1980s, investor Carl Icahn targeted undervalued stocks with book values higher than market caps. He bought TWA Airlines this way and made substantial profits by selling off parts of the business.
When to Use P/B Ratio
Best for:
- Banks and financial companies.
- Manufacturing and asset-heavy businesses.
- Finding deeply undervalued stocks.
Less useful for:
- Tech companies (most value is intangible).
- Service businesses with few physical assets.
- Comparisons - only helpful to measure a specific company's assets to its price, not against other companies.
Method 4: PEG Ratio (Price/Earnings to Growth)
What It Is
The PEG ratio adjusts the P/E ratio for growth.
A high P/E isn't necessarily bad if the company is growing fast. The PEG ratio accounts for this.
How To Find It
Formula: P/E Ratio ÷ Expected Earnings Growth Rate
Real Example: DataDog
DataDog is considered a growth stock. Let's calculate its PEG ratio.
Note: All numbers used are calculated from data found in December 2025. These numbers are likely out of data and are being used for education purposes only.
Step 1: Find the P/E ratio
- DataDog P/E: 455 (very high!)
Step 2: Find expected earnings growth
- Analyst estimate: 18.5% annual growth.
Step 3: Calculate PEG
- PEG = 455 ÷ 18.5 = 24.6.
What This Means
| PEG Ratio | Meaning |
| Less than 1.0 | Potentially undervalued for its growth |
| Equal to 1.0 | Fair value for its growth |
| Greater than 1.0 | Potentially overvalued for its growth |
DataDog's PEG of 24.6 is extremely high. This suggests the stock is overvalued relative to its projected growth.
However, investors might believe:
- Analyst estimates are too conservative.
- The company has advantages not reflected in numbers.
- The market is willing to pay a premium for quality.
When to Use PEG Ratio
Best for:
- Growth stocks.
- Comparing companies with different growth rates.
- Tech companies and disruptors.
Note: You need reliable growth estimates. Bad estimates give you bad PEG ratios.
Method 5: EV/EBITDA Ratio
What It Is
This ratio compares Enterprise Value to EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization).
It's more complex but gives you a clearer picture of value.
How To Find It
Enterprise Value (EV): Market Cap + Total Debt - Cash
EBITDA: Company's earnings before accounting costs
Real Example: Nvidia
Let's calculate Nvidia's EV/EBITDA.
Step 1: Calculate Enterprise Value
- Market cap: $4.37 trillion.
- Total debt: $32.27 billion.
- Cash: $8.58 billion.
- EV = $4.37T + $32.27B - $8.58B = $4.39 trillion.
Step 2: Calculate EBITDA
- Net income: $72.8 billion.
- Add back: Interest ($247 million).
- Add back: Taxes ($11.1 billion).
- Add back: Depreciation & Amortization ($1.86 billion).
- EBITDA = $86 billion.
Step 3: Calculate EV/EBITDA
- EV/EBITDA = $4.39T ÷ $86B = 51x.
What This Means
Nvidia's enterprise is valued at 51 times its EBITDA.
Let's compare to competitors:
| Company | EV/EBITDA |
| Nvidia | 51x |
| AMD | 27.5x |
| Taiwan Semiconductor | 13.3x |
| Intel | 17.82x |
Nvidia's much higher ratio shows the market expects significantly more growth from Nvidia than its competitors.
When to Use EV/EBITDA
Best for:
- Comparing companies with different debt levels.
- Industries with heavy depreciation (manufacturing, telecom).
- Merger and acquisition valuations.
Method 6: Dividend Yield
What It Is
Dividend yield shows how much income you get from dividends relative to the stock price.
How To Find It
Formula: Annual Dividend Per Share ÷ Stock Price
Real Example: Exxon Mobil
Stock price: $102.64 Annual dividend: $3.96 per share Dividend yield: $3.96 ÷ $102.64 = 3.87%
What This Means
For every share you own, you receive 3.87% of the stock price back as cash each year.
| Dividend Yield | What It Might Mean |
| 0-2% | Low yield (growth focus) |
| 2-4% | Moderate yield (balanced) |
| 4-6% | High yield (income focus) |
| Over 6% | Very high (could signal trouble) |
The Power of Dividend Reinvestment
Here's where dividends get interesting.
If you own 26 shares of Exxon Mobil at $102.64 each:
- Initial investment: $2,668.64.
- Annual dividends: $102.96.
That's enough to buy one more share each year. Your dividends buy more shares. Those new shares generate more dividends. It snowballs.
After 10 years (assuming steady prices and dividends):
- You'd own 38 shares.
- Your annual dividend income: nearly $300.
When to Use Dividend Yield
Best for:
- Income investors.
- Retirees needing cash flow.
- Evaluating mature, stable companies.
Warning signs:
- Extremely high yields often mean the stock price crashed - a company may incentivize investors to own its shares by offering a higher yield.
- High yields can signal the dividend is about to be cut.
Method 7: Non-Financial Factors (Non-Financial Analysis)
Numbers don't tell the whole story. You also need to evaluate the business itself.
The Four Key Questions
Question 1: What's the business model?
Understand how the company makes money.
Take Coca-Cola:
- They sell beverages globally.
- They sell syrup and concentrates to bottlers.
- They've been doing this since 1866.
- They're an iconic American brand.
Question 2: Who's the CEO?
Leadership matters enormously.
Coca-Cola's CEO is James Quincey as of 2025:
- Joined in 1996.
- Background in consulting (Bain).
- Led Coca-Cola's expansion into Latin America.
- Known for strategic, data-driven approach.
You can find CEO information on company investor relations pages or through web searches.
Question 3: Is the company innovating?
Companies that fail to innovate get left behind.
Coca-Cola is innovating:
- Expanded partnerships (like Jack Daniels).
- Joined MIT AI groups.
- Using AI for personalized advertising.
- Collecting and monetizing consumer data.
Compare this to Blockbuster. They failed to innovate when Netflix introduced streaming. Blockbuster went bankrupt. Netflix thrived.
Question 4: What's the moat?
A moat is a competitive advantage that protects the company.
Coca-Cola's moats:
- Brand strength: One of the most recognized brands globally.
- Distribution network: Available in all but 3 countries worldwide.
- Partnerships: Exclusive deals with McDonald's, restaurants, venues.
These advantages are nearly impossible for competitors to replicate.
When to Use Non-Financial Analysis
Always. Numbers alone miss critical context.
A company might have great financial ratios but:
- Terrible leadership.
- Dying industry.
- No innovation.
- No competitive advantage.
You need both financial AND non-financial analysis.
Comparing Methods: Which Should You Use?
Different methods work better for different situations.
| Valuation Method | Best For | Limitations |
| P/E Ratio | Profitable companies, quick comparisons | Doesn't work for unprofitable companies |
| P/S Ratio | Unprofitable but growing companies | Ignores profitability completely |
| P/B Ratio | Banks, asset-heavy companies | Less useful for service/tech companies |
| PEG Ratio | Growth stocks with different growth rates | Requires accurate growth estimates |
| EV/EBITDA | Comparing companies with different debt | More complex to calculate |
| Dividend Yield | Income investors, mature companies | Growth companies often don't pay dividends |
| Non-financial | All companies | Subjective, harder to measure |
The Professional Approach
Professional investors don't use just one method. They use multiple methods together.
For instance, a complete analysis of Microsfot might include:
- P/E ratio compared to tech sector average.
- P/S ratio compared to competitors like Apple.
- EV/EBITDA to account for debt levels.
- Non-financial analysis of CEO Satya Nadella's leadership.
- Evaluation of Microsoft's moat (cloud infrastructure, enterprise relationships).
- Assessment of innovation (AI integration, new products).
The more methods that point in the same direction, the more confident you can be.
Common Mistakes to Avoid
Mistake 1: Using Only One Method
No single ratio tells the complete story. A stock might look cheap on P/E but expensive on P/B.
Mistake 2: Ignoring Industry Context
A P/E of 30 might be expensive for a utility company but cheap for a tech company. Always compare to industry peers.
Mistake 3: Forgetting to Compare
Ratios mean nothing in isolation. Compare to:
- The company's historical ratios
- Direct competitors
- Industry averages
Mistake 4: Chasing High Dividend Yields
A 10% dividend yield often means the stock has higher risk.
Mistake 5: Ignoring the Business
Perfect financial ratios mean nothing if:
- The CEO just got fired.
- A competitor invented something revolutionary.
- The industry is dying.
Always do non-financial analysis too.
Warren Buffett's Valuation Method
Warren Buffett combines several approaches:
1. Book Value: He looks for companies trading below book value.
2. Non-financial Factors: He invests in businesses he understands with strong moats.
3. Management Quality: He wants honest, capable leaders.
4. Long-term Value: He holds stocks for years or decades, not months.
5. Margin of Safety: He only buys when he can get a significant discount to true value.
Buffett's famous quote: "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."
His approach emphasizes quality over pure cheapness.
How to Start Valuing Stocks Today
Step 1: Pick three companies you're interested in.
Step 2: Find their most recent 10-K reports on the SEC's EDGAR website.
Step 3: Calculate at least three valuation ratios for each:
- P/E ratio.
- P/S ratio or P/B ratio.
- Dividend yield (if applicable).
Step 4: Research the non-financial factors:
- Business model.
- CEO background.
- Innovation initiatives.
- Competitive advantages.
Step 5: Compare each company to its main competitors.
Step 6: Ask yourself: Based on all this analysis, is the stock price higher or lower than its real value?
Frequently Asked Questions
What is the most accurate way to value a stock?
There's no single "most accurate" method.
Professional investors use multiple valuation methods together.
Combine P/E ratio, book value, and non-financial analysis for the most complete picture. The best approach depends on the company type and industry.
Which stock valuation method is best?
The best method depends on the company. You can use P/E ratio for profitable companies. Some investors use P/S ratio for unprofitable but growing companies.
P/B ratio is better for banks and asset-heavy businesses.
PEG ratio can be used for growth stocks.
Always combine with non-financial analysis to ensure you’re doing your due diligence before investing.
What is Warren Buffett's method of valuation?
Warren Buffett combines book value analysis with non-financial factors.
He looks for companies with strong moats, quality management, and fair prices.
He prefers P/E ratios between 15-30 and focuses on long-term value rather than short-term gains.
What are the 5 methods of valuation?
The five core methods are:
(1) P/E ratio (price-to-earnings).
(2) P/S ratio (price-to-sales).
(3) P/B ratio (price-to-book).
(4) PEG ratio (P/E to growth).
(5) EV/EBITDA (enterprise value to earnings).
Most investors also include dividend yield and non-financial analysis as well.
What is the easiest method of valuation?
The P/E ratio is typically considered the easiest method for stock valuation.
Simply divide the stock price by earnings per share.
You can find P/E ratios already calculated on most financial websites. It's quick and works well for comparing profitable companies in the same industry.
What is the most ideal method of valuation of stock and why?
The most ideal approach combines multiple methods. Use financial metrics (P/E, P/S, P/B) with non-financial analysis (business model, CEO, moat, innovation).
No single method catches everything. Professional investors always use several methods together to see the complete picture before investing.
Final Thoughts: 7 Stock Valuation Methods
Valuing stocks isn't about finding the "perfect" method. It's about using multiple methods together to understand what a company is truly worth.
Start simple. Calculate P/E ratios. Compare book values. Study the business itself.
As you gain experience, add more sophisticated methods like EV/EBITDA and PEG ratios.
Remember Warren Buffett's wisdom: Price is what you pay. Value is what you get..
Your goal isn't to time every investment perfectly. Your goal is to develop a system for determining value and making informed decisions.
Start practicing today. Pick a stock. Run the numbers. See what you discover.
The better you get at valuation, the better you'll be at spotting opportunities others miss.
Speaking of which - Each week, our analyst comb through company reports and earnings calls to find the latest market shifts on Wall Street.
We then help you spot these potential opportunities in our Market Briefs pro report.
You can learn more and subscribe to Market Briefs Pro here.

