The KPIs That Decide
The calculation chain from share price to valuation, the metrics that separate a good business from a cheap one, and why companies become overvalued.
- 01Company size is market capitalisation, never share price. Enterprise value adjusts it for debt and cash.
- 02A price-to-earnings ratio is meaningless alone; it acquires meaning next to a growth rate.
- 03A high multiple is a promise the market has already paid for. If growth merely slows, the share falls hard.
The calculation chain
4.1Share price tells you nothing on its own
A €4 share is not cheaper than a €400 one — it is a smaller slice. How many slices exist is arbitrary. Company size is market capitalisation: share price multiplied by shares outstanding.
4.2Enterprise value adjusts for the balance sheet
Market cap prices the equity. Enterprise value prices the whole business: market cap, plus debt, less cash — what an acquirer would actually pay, because they inherit the debt and receive the cash. Two companies with identical market caps are not equally priced if one carries €5bn of debt.
When P/E shows "N/A" the company has no profits, so there is nothing to divide by. That is not automatically bad — many young companies are deliberately unprofitable while they grow — but this particular metric cannot help you, and the business has to be judged another way.
Never compare share prices between companies. Compare market caps for size, enterprise value when debt is significant, and P/E only against companies in the same sector.
Is it too expensive?
4.3Price only means something next to growth
A P/E of 40 sounds expensive and 10 sounds cheap. Both readings are worthless without knowing which way the profits underneath are moving. Dividing the P/E by the growth rate gives the PEG ratio: roughly 1 suggests price and growth are in balance, well above suggests optimism is doing the work.
Run it yourself. Hold the price still and drag the growth rate: the same multiple travels from "expectation is doing the work" to "cheap, if the growth is real" without the share price moving at all.
At 18% a year, earnings need 4.4 years to grow into a 15× multiple at today’s price. Everything you make beyond that depends on the growth continuing past the point you have already paid for.
4.4Why companies become overvalued
A high multiple is not a mistake — it is a promise the market has already paid for. The risk is asymmetric: if growth merely slows, without reversing, a richly valued share can fall 40% while the business remains perfectly healthy. The company did not fail; the expectation did.
4.5The value trap
When a share looks strikingly cheap against its peers, the first assumption should not be that you have spotted something thousands of professionals missed. It should be that the market is pricing something you have not looked for yet.
The table is the theory. Applying it to a set of figures under mild time pressure is the skill, and it is worth practising before real money depends on it — five cases below, each a constructed composite rather than a real company.
Judge price against growth, against the sector, and against the company’s own history. Then write down what would have to be true for the valuation to make sense — if you cannot state it in a sentence, you do not have a thesis.
Open any card on Stock Analysis. Market cap, P/E, revenue growth and net margin across the top are now four numbers you can read and challenge rather than skip.
Stock Analysis