Valuation

• CAPE ratioPrice divided by average inflation-adjusted earnings over ten years, to smooth out the business cycle.
• Cost of equityThe return shareholders require for the risk of owning a company’s shares.
• Discount rateThe rate used to convert future money into what it is worth today.
• Discounted cash flowValuing a business by estimating its future cash flows and converting them to today’s money.
• Dividend discount modelValuing a share as the present value of all the dividends it will ever pay.
• EV/EBITDAEnterprise value divided by earnings before interest, tax, depreciation and amortisation.
• EV/SalesEnterprise value divided by revenue — price-to-sales corrected for debt and cash.
• Earnings yieldEarnings per share divided by price — the P/E ratio inverted, expressed as a percentage.
• Economic moatA durable structural advantage that lets a company keep earning high returns without being competed away.
• Enterprise valueWhat it would cost to buy the whole business: market value plus debt, minus cash.
• ExpectationsWhat the market already assumes about a company’s future, which its current price encodes.
• Fed modelA rough comparison of the market’s earnings yield with the government bond yield.
• Forward P/EPrice divided by the earnings analysts expect next year, rather than last year’s actual earnings.
• Free cash flow yieldFree cash flow divided by market value — the cash return the business generates relative to its price.
• Intrinsic valueWhat an asset is actually worth based on the cash it will produce, regardless of its market price.
• Margin of safetyThe gap between what you pay and what you think something is worth, sized to absorb being wrong.
• Mean reversionThe tendency of extreme values — margins, multiples, returns — to drift back towards long-run averages.
• P/E ratioThe share price divided by earnings per share — roughly, how many years of current profit you are paying.
• PEG ratioThe P/E ratio divided by the expected earnings growth rate, to compare companies growing at different speeds.
• Price-to-bookMarket value divided by the accounting value of the company’s net assets.
• Price-to-salesMarket value divided by annual revenue — a multiple that still works when there are no profits.
• Reverse DCFWorking backwards from the share price to find what growth the market is already assuming.
• Terminal valueThe estimated value of all cash flows beyond the explicit forecast period in a valuation.
• Value investingBuying assets for less than an estimate of their intrinsic worth, with a margin of safety.
• Value trapA share that looks cheap on the numbers and stays cheap because the business is deteriorating.
• WACCThe blended cost of a company’s debt and equity funding, weighted by how much of each it uses.

Educational reference only. Nothing here is investment advice or a recommendation to buy or sell anything, and tax treatment depends on your own circumstances and the country you are in.