Introduction — What Does "Expensive" Even Mean?
People new to stocks are often drawn to the absolute price. "This stock is 50 dollars and that one is 500 dollars, so the latter is expensive." But the absolute price per share tells you almost nothing. The price of a single share simply depends on how many slices the company was cut into (the share count).
Valuation is the work of asking whether a company's price is reasonable relative to the earnings it produces or the assets it holds. In other words, it compares price against fundamentals: earnings, assets, sales, and cash flow. This article walks through the headline metrics that make that comparison possible.
> This article is for information and education only and is not investment advice or a solicitation. All investment decisions and their consequences rest entirely with you. Consult a qualified professional where appropriate. Nothing here is a recommendation to buy or sell any specific security, nor an assertion of a price target.
1. What Valuation Is
There are two broad routes to a company's value.
1. **Intrinsic value**: discount the company's future cash flows to the present to estimate "what the business itself is worth." The classic tool is the DCF (discounted cash flow).
2. **Relative value**: compare with similar companies to see whether it is cheap or expensive versus peers. Multiples such as PER, PBR, and EV/EBITDA belong here.
In practice both are used together. Relative value locates the company quickly; intrinsic value checks whether that location is sensible.
A few terms first.
| Term | Meaning | Analogy |
| --- | --- | --- |
| Market cap | Price times shares = total equity price of the firm | The sale price of one house |
| EV (enterprise value) | Market cap plus net debt = actual cost to acquire | House price plus the mortgage you take on |
| EPS | Earnings per share = net income divided by shares | What one share earns |
| BPS | Book value per share = equity divided by shares | The book-value belongings of one share |
2. PER — How Many Times Earnings Is It Trading At
PER (Price to Earnings Ratio) is the most widely used metric.
PER = Price / Earnings per share (EPS)
= Market cap / Net income
A PER of 15 can be read as "if the company keeps earning at today's level, it takes 15 years to earn back the price." Lower is, on first reading, cheaper relative to earnings.
There are two versions.
- **Trailing PER**: based on the last 12 months of actual earnings. Factual but backward-looking.
- **Forward PER**: based on the next 12 months of expected earnings. Forward-looking, but the estimate can be wrong.
A growing company shows a lower forward than trailing PER, because future earnings are expected to be larger.
A Common Misreading of PER
A low PER is not automatically cheap. Earnings may be temporarily inflated (gains on asset sales, for example), or the market may have already marked the price down in anticipation of falling earnings. That is the value trap. Conversely, a high PER can be justified if earnings are growing fast.
3. PBR — How Many Times Book Value
PBR (Price to Book Ratio) divides the price by book value per share (BPS).
PBR = Price / Book value per share (BPS)
= Market cap / Shareholders' equity
A PBR of 1 means the market values the company at exactly its book net assets. Below 1 is sometimes read as "even liquidating and selling all assets would fetch more than today's market cap" (though book value is no guarantee of actual disposal value).
PBR is especially useful for banks, insurers, and brokerages, where assets are the heart of the business. It fits poorly for asset-light software firms, whose value lives in intangible brand, technology, and people that never appear on the balance sheet.
The standard move is to read it alongside ROE (return on equity). High ROE with low PBR may be an undervaluation candidate; low ROE with high PBR may signal excessive hope.
4. PSR and PEG — Tools for Loss-Making and Growth Companies
PSR — Valued Against Sales
PSR (Price to Sales Ratio) divides market cap by sales.
PSR = Market cap / Sales
An early-stage growth company with no profit yet cannot have a PER (the denominator is negative). Sales exist, so PSR steps in. But large sales mean little if they never become profit, so read PSR alongside gross margin.
PEG — PER Adjusted for Growth
PEG (Price/Earnings to Growth) divides PER by the earnings growth rate to see "PER relative to growth."
PEG = PER / annual earnings growth rate (%)
Popularized by Peter Lynch, a PEG near 1 is often considered fair, and comfortably below 1 cheap relative to growth. A PER of 30 with 30 percent earnings growth gives a PEG of 1. A PER of 15 with only 5 percent growth gives a PEG of 3, which is actually expensive.
| Company | PER | Earnings growth | PEG | First reading |
| --- | --- | --- | --- | --- |
| A (growth) | 30 | 30% | 1.0 | Fair for the growth |
| B (value) | 12 | 4% | 3.0 | Slow growth, relatively pricey |
| C (low-growth low-PER) | 8 | 2% | 4.0 | Check for a trap |
PEG's weakness is its heavy dependence on the growth estimate. Growth is a future number, easily wrong, and small differences swing the result a lot.
5. EV/EBITDA — Comparison with Capital Structure Stripped Out
EV/EBITDA tries to compare the earning power of the business itself, with the effects of debt, tax, and depreciation removed.
EV (enterprise value) = Market cap + net debt
EBITDA = Operating income + depreciation + amortization
EV/EBITDA = EV / EBITDA
PER struggles to compare a heavily indebted firm with a debt-free one, because interest expense flows into net income. EV/EBITDA includes debt in the numerator and excludes interest, tax, and amortization from the denominator, so it compares firms of different capital structures more fairly. It is common in M&A practice.
The drawbacks are clear. EBITDA is not actual cash flow, and ignoring depreciation can be dangerous in capital-intensive industries. The criticism "EBITDA is not real earnings" follows it everywhere.
6. Growth vs Value — Same Multiple, Different Meaning
The same PER of 20 can imply opposite assessments depending on context.
[Growth stock]
High PER ── pre-prices expectations of strong future growth
│
├─ If growth materializes -> justified
└─ If growth stalls -> sharp re-rating down (de-rating)
[Value stock]
Low PER ── mature, low growth, low market expectations
│
├─ If results beat -> room for re-rating
└─ If structurally declining -> value trap
Growth investing is a bet that "it looks expensive now, but future earnings will catch up." Value investing is a bet that "the market is too pessimistic, and that pessimism will unwind." Neither is always right, and the edge shifts with rates and the economic cycle. Conventionally, when rates are low the present value of distant future earnings rises and growth stocks shine; when rates are high, current earnings and cash matter more and value tends to draw attention.
7. The Traps of Multiples — Don't Judge on One Number
Valuation metrics are powerful, but dangerous used alone. The classic traps:
1. **One-off gains and losses**: asset sales or litigation settlements distort EPS. Normalize to recurring earnings.
2. **Cycle peaks and troughs**: cyclicals (semiconductors, steel, chemicals) show their lowest PER (looking cheapest) at the earnings peak and highest PER at the trough. The opposite of intuition.
3. **Accounting differences**: treatment varies by country and industry, making naive comparison hard.
4. **Growth illusion**: a bad prior year makes this year's growth look explosive (base effect).
5. **Ignoring debt**: PER alone misses debt risk. Supplement with EV-based metrics.
The principle is simple. A multiple is a starting point for questions, not a conclusion.
8. DCF — The Logic of Intrinsic Value, Briefly
DCF (discounted cash flow) discounts a company's future free cash flow (FCF) at an appropriate rate and sums it to a present value.
Enterprise value = Sum of ( future FCF(t) / (1 + r)^t ) + PV of terminal value
r = discount rate (WACC, weighted average cost of capital)
t = year
The logic is crisp: "10,000 a year from now is worth less than 10,000 today, so discount future cash and add it up." But in practice DCF is extremely sensitive to assumptions. Small changes in growth or discount rate swing the output sharply. So it is healthier to treat DCF as a tool for a range of values under assumptions rather than a single precise answer. A sensitivity analysis (a grid of value across assumption combinations) is recommended.
9. Sector Differences — One Yardstick Won't Measure All
The right metric depends on the industry.
| Sector | Common metrics | Why |
| --- | --- | --- |
| Banks, insurers | PBR, ROE | Assets and capital are the core of the business |
| Software, platforms | PSR, EV/sales, user metrics | Early on, growth and sales over profit |
| Manufacturing, consumer | PER, EV/EBITDA | Stable earnings structure |
| Real estate, infra | Dividend yield, FFO, NAV | Cash flow and asset value driven |
| Resources, energy | EV/EBITDA, reserves | Cycle and asset based |
Stage matters too. Early on the weight sits on sales and users; at maturity it shifts to earnings and dividends.
10. Limits — What Valuation Does Not Tell You
Valuation tells you "where price sits versus fundamentals," but it does not guarantee:
- **Timing**: a cheap stock can get cheaper and an expensive one more expensive. Markets can stay irrational for a long time.
- **Qualitative factors**: management quality, moats, regulatory change, and technological disruption rarely fit into the numbers.
- **The macro environment**: rates, currencies, and the cycle lift or compress whole multiple bands.
So read the numbers (quantitative) together with an understanding of the business (qualitative). It helps to write out both the bull and bear cases and to check which assumption, if broken, would flip your view.
11. Working It Out — Comparing Two Hypothetical Companies
Running the numbers yourself beats abstract explanation. Take two hypothetical companies and compute the multiples (these are invented examples, unrelated to any real security).
Company Garam Electronics (mature)
- Price: 50,000
- Shares: 20,000,000
- Net income: 100,000,000,000
- Equity: 800,000,000,000
- Net debt: 200,000,000,000
- Operating income: 130,000,000,000, depreciation: 40,000,000,000
Market cap = 50,000 times 20m = 1,000,000,000,000
EPS = 100b / 20m = 5,000
PER = 50,000 / 5,000 = 10x
BPS = 800b / 20m = 40,000
PBR = 50,000 / 40,000 = 1.25x
EV = 1,000b + 200b = 1,200b
EBITDA = 130b + 40b = 170b
EV/EBITDA = 1,200b / 170b = ~7.1x
Company Narae Software (growth)
- Price: 80,000
- Shares: 10,000,000
- Net income: 20,000,000,000
- Sales: 150,000,000,000
- Expected earnings growth: 25% per year
Market cap = 80,000 times 10m = 800,000,000,000
EPS = 20b / 10m = 2,000
PER = 80,000 / 2,000 = 40x
PSR = 800b / 150b = ~5.3x
PEG = 40 / 25 = 1.6
Garam, at PER 10x and EV/EBITDA 7x, is the archetype of a mature firm that "looks cheap on earnings." Narae looks expensive at PER 40x, but if earnings really grow fast that multiple may be justified (though a PEG of 1.6 means it is not especially cheap for the growth). Putting both on the same table and asking "why the difference?" is the starting point of valuation.
12. Principles for Comparing Multiples — Apples with Apples
Multiples gain meaning through comparison rather than from the absolute number. Three benchmarks are common.
1. **Peer comparison**: against competitors in the same industry. The most intuitive, but the choice of peer set drives the result.
2. **Historical band**: where the company's own PER has ranged over the past 5 to 10 years. Whether today sits at the top or bottom of that band is a clue.
3. **Market multiple**: against the index PER, to gauge the premium or discount versus the market.
The caution: "there may be a reason it looks cheap." A low PER versus peers may reflect lower growth, higher risk, or governance issues the market is discounting. When you find a multiple gap, chase down "why the gap exists" to the end.
13. Frequently Asked Questions
What does a negative PER mean?
That net income is a loss. PER is meaningless here, so value with PSR, EV/sales, or expected earnings at the point of turning profitable.
Why do PERs differ so much within one industry?
Because growth, profitability (margins), risk (debt, volatility), capital efficiency (ROE), and governance differ. The multiple is the product of all those differences.
Can I just look at one multiple?
Dangerous. Each metric shows one cross-section. PER looks at earnings, PBR at assets, EV/EBITDA at capital-structure-neutral earning power. You need several together for a 3D picture.
What is a fair PER?
There is no fixed answer. It depends on rates, growth, industry, and the market phase. Rather than asserting a "fair PER," it is healthier to vary the assumptions (growth, discount rate) and look at a range.
14. A Practical Checking Workflow
A simple workflow for applying valuation in practice.
Step 1 Understand the business How does it make money, what is the moat?
Step 2 Choose metrics Pick multiples that fit industry and stage
Step 3 Compute PER, PBR, PSR, PEG, EV/EBITDA
Step 4 Compare Against peers, history, market
Step 5 Verify Sanity-check assumptions via DCF (sensitivity)
Step 6 Combine qualitative Management, regulation, tech, macro risk
Step 7 Hold conclusion Lay out bull/bear scenarios and breaking assumptions
The heart of this flow is "don't conclude on one number." At each step, ask questions, write down the assumptions, and check what happens if those assumptions are wrong. That is the habit of good valuation.
15. ROE and Multiples — Why a High PBR Can Be Justified
Looked at alone, PBR tempts the oversimplification "below 1 is cheap," but it must be read with ROE. A company that compounds its equity at a high return reasonably earns a higher PBR.
[Intuitive relationship of PBR and ROE]
High ROE + low PBR -> undervaluation candidate (ask why the market shuns it)
High ROE + high PBR -> may be the normal price of a quality stock
Low ROE + low PBR -> possible value trap
Low ROE + high PBR -> excessive hope, risk of disappointment
Theoretically, when sustainable ROE exceeds the cost of capital, the firm creates value as it adds capital, so a PBR above 1 is normal. Conversely, when ROE is below the cost of capital, capital destroys value, so PBR can sit below 1. In short, PBR is a condensed number for the market's judgment of how well a company compounds its capital (ROE).
This relationship touches the often-discussed "low-PBR stocks" in the Korean market. A low PBR alone is hard to read as undervaluation; you must also check whether there is a basis for the ROE to improve (stronger shareholder returns, better capital efficiency, and so on).
16. Multiple De-rating and Re-rating — Price Doesn't Move on Earnings Alone
A share price can be decomposed roughly into the product of two factors.
Price ≈ earnings (EPS) times multiple (PER)
So a price can rise because earnings grew, or because the multiple the market assigns to the same earnings rose (re-rating). Conversely, even with flat earnings, a compressed multiple (de-rating) sends the price down. This decomposition matters because late in bull markets a stretch often appears where "earnings are flat but the multiple inflates."
[Two sources of a price rise]
Earnings-driven rise -> relatively solid (backed by results)
Multiple-expansion rise -> dependent on expectations (high reversal risk)
When growth expectations stall or rates rise, multiples can contract fast, and the price can fall sharply even with healthy earnings. So the habit of distinguishing "is this rise from earnings or from the multiple?" helps separate bubble from substance. Rather than asserting which is right, the balanced view splits the two sources and weighs the sustainability of each.
17. Rates and Valuation — Invisible Gravity
One of the biggest macro variables governing valuation as a whole is the interest rate. Recall that the discount rate sits in the denominator of the DCF formula, and it becomes intuitive. When rates rise, the discount rate rises, and the present value of the same future cash flow shrinks. Growth stocks, whose earnings lie mostly in the distant future, feel the discount more.
[General relationship of rates and multiples]
Rates fall -> discount rate falls -> PV of future earnings rises -> multiples tend to expand
Rates rise -> discount rate rises -> PV of future earnings falls -> multiples tend to contract
This is the backdrop to the conventional view that "growth stocks shine when rates are low, value when rates are high." But reality is more complex. Rates, the economy, corporate results, and sentiment all act together, so rates alone cannot dictate the direction of prices. The key is to hold the awareness that "rates are background gravity acting on all multiples" and to check how much your valuation assumptions depend on a particular rate environment. In phases like 2026, where the market's attention is fixed on the path of monetary policy, several outlets have noted this check is especially important.
18. Common Mistakes Beginners Make
Collecting the traps people fall into when first learning valuation helps you avoid repeating them.
[Commonly seen mistakes]
1. Judging cheap/dear by absolute price -> use multiples
2. Concluding from PER alone -> need several metrics plus qualitative
3. Low PER = automatically undervalued -> check for a value trap
4. Assuming high growth forever -> growth always slows
5. Picking the wrong peer set -> apples with apples
6. Mistaking one-off gains for normal -> normalize to recurring
7. Ignoring debt (PER only) -> supplement with EV-based metrics
8. Never doubting your assumptions -> confirm a range via sensitivity analysis
What these share is "the temptation to simplify." The urge to conclude from one number, one metric, one assumption invites mistakes. Good valuation starts by not rushing the conclusion, asking from several angles, and doubting your own assumptions.
19. The Metrics at a Glance
Finally, a table summarizing the metrics covered in this article.
| Metric | What it sees | Strength | Weakness |
| --- | --- | --- | --- |
| PER | Price vs earnings | Intuitive, widely used | Fragile to losses, one-offs, cycles |
| PBR | Price vs assets | Useful for asset-heavy sectors | Poor fit for intangible-heavy firms |
| PSR | Price vs sales | Works for loss-making firms | Check separately if it becomes profit |
| PEG | PER vs growth | Useful for growth stocks | Sensitive to the growth estimate |
| EV/EBITDA | Capital-structure-neutral earning power | Compares differently-levered firms | EBITDA is not cash flow |
| DCF | Intrinsic value (cash flow) | Logically consistent | Extremely sensitive to assumptions |
No single metric is complete on its own. The key is to pick those that fit the industry and stage, cross-check several, and combine with qualitative understanding.
Closing
Valuation is not a calculator that hands you the right answer; it is a framework for comparing price and value and for sharpening your questions. PER, PBR, PSR, PEG, and EV/EBITDA each look from a different angle, and which one fits depends on industry and stage. Don't cling to a single number: cross-check several, combine them with qualitative understanding, and question the assumptions.
> To repeat: this article is for information and education only and is not investment advice or a solicitation. All decisions and their consequences are yours; consult a qualified professional where appropriate.
References
- Investopedia, Price-to-Earnings (P/E) Ratio: https://www.investopedia.com/terms/p/price-earningsratio.asp
- Investopedia, Price-to-Book (P/B) Ratio: https://www.investopedia.com/terms/p/price-to-bookratio.asp
- Investopedia, PEG Ratio: https://www.investopedia.com/terms/p/pegratio.asp
- Investopedia, EV/EBITDA: https://www.investopedia.com/terms/e/ev-ebitda.asp
- Investopedia, Discounted Cash Flow (DCF): https://www.investopedia.com/terms/d/dcf.asp
- CFA Institute, Equity Valuation: https://www.cfainstitute.org/insights
- Aswath Damodaran, Valuation resources (NYU Stern): https://pages.stern.nyu.edu/~adamodar/
- Reuters, Markets: https://www.reuters.com/markets/
- U.S. SEC, EDGAR company filings: https://www.sec.gov/edgar
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People new to stocks are often drawn to the absolute price. "This stock is 50 dollars and that one i...