Valuation determines what a company is WORTH vs what its stock COSTS. Frameworks: (1) P/E Ratio — simplest. NIFTY average 20-22x. (2) P/B — for banks and asset-heavy companies. (3) EV/EBITDA — for capital-intensive businesses. (4) DCF — most correct but assumption-sensitive. (5) PEG Ratio — P/E ÷ Growth Rate. PEG < 1 = undervalued. No single metric works alone — P/E of 10x can be overvalued at earnings peak, P/E of 50x can be undervalued for a 30% CAGR compounder.
Key points
P/E is most common but misleading for cyclical stocks at peaks
PEG < 1 = growth at a reasonable price; PEG > 2 = overvalued
Always compare to: own history, peer median, and growth rate
Cheap valuations don't mean 'buy' — need catalysts to unlock value
Expensive valuations don't mean 'sell' — compounders stay expensive for years
Margin of Safety = buy 20-30% below fair value estimate
Formula
PEG = P/E ÷ EPS Growth %. Stock A: P/E 30x, growth 25% → PEG 1.2 (fair). Stock B: P/E 15x, growth 5% → PEG 3.0 (expensive despite 'low' P/E!).
Pro tip — Create a 'wish list' of 20 companies with target buy P/E for each during calm markets. When panic hits, your buy list is ready. Don't calculate fair value during a crash — emotions bias everything.