Stock Valuation Methodology: Understanding a Company’s True Value Through 13 Models

"Price is what you pay; value is what you get." — Warren Buffett In investing, your purchase price determines your return ceiling. For the same company, buying at ¥20 versus ¥50 leads to vastly different long-term returns. This article systematically introduces 13 classic valuation methods and provides an open-source Python framework to help you assess any company’s intrinsic value—just like professional equity analysts. I. Why Multi-Dimensional Valuation? Limitations of a Single Method If you rely solely on the P/E ratio: Company P/E Conclusion Kweichow Moutai 25x Expensive? Tech Stock 25x Cheap? Bank 25x Expensive! The same P/E of 25x carries entirely different implications across company types. Solution: Cross-Validation Across Multiple Dimensions Professional investors never rely on a single metric. They: 1. Select valuation methods appropriate to the company’s type; 2. Cross-validate using multiple methods; 3. Derive a valuation *range*, not a single point estimate; 4. Compare that range with the current market price to assess margin of safety. II. Overview of Valuation Method Categories I classify the 13 methods into five broad categories based on applicability. III. Detailed Methodologies 3.1 Defensive Valuation (Graham School) Suitable for: Conservative investors, blue-chip stocks, defensive portfolio allocations ① Graham Number Formula: Rationale: Introduced by Benjamin Graham in *The Intelligent Investor*, this formula combines earnings power (EPS) and asset-based safety margin (BVPS). The constant 22.5 derives from an upper bound of 15× P/E × 1.5× P/B. Applicability: ・Steadily profitable blue-chip companies ・Cyclical industries at troughs ・A safety-oriented buy price for defensive investors Example: ② Graham Formula Formula: ・8.5: Fair P/E for a zero-growth company ・g: Expected growth rate (%) ・4.4: AAA corporate bond yield in 1962 ・Y: Current AAA corporate bond yield

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For any questions regarding quantitative live trading, strategy consulting, programming technical support, or for access to a free QMT strategy terminal and quantitative trading system—or if you’d like to learn more about other quantitative strategies—feel free to leave a comment or send a private message. We also support opening brokerage accounts at the industry’s lowest commission rate (0.01%). 1. The Value-Oriented Path of Quantamental Investing Since 2019, sentiment-driven investing and ‘beat-consensus’ investing have surged—and then rapidly faded within just a few years. Investors lament that market efficiency has become too strong. Yet the root cause may lie in how both approaches focus excessively on short-term company characteristics: racing to acquire information faster, and betting on the continuation of near-term high growth. In assessing a company’s overall investment value, however, long-term factors—and especially terminal-value factors—carry substantial weight. This is particularly true for firms with competitive advantages, durable moats, and sustainable long-term growth potential: judgments about distant cash flows often matter more than estimates of near-term cash flows. Even for virtually non-growing companies, the value reflected on the balance sheet—i.e., the company’s *current* worth—typically outweighs the value represented by earnings over the next 1–5 years. For investors seeking stable returns, stock valuation should center on the resources a company holds *today*, and the level of returns it can sustain *over the long term* under stable operations. A two-stage residual income valuation model shows that near-term operating returns contribute only a small share to total value. For low-growth firms, current net assets dominate total value—making analysis of their replacement cost and sustainability critical. For high-growth firms, long-term return projections dominate total value—making analysis of the company’s ‘endgame’: its long-term industry size, competitive structure, competitive advantages, and strategic positioning, far more important. In theory, sound valuation requires rigorous attention to all these dimensions. Re-examining the commonly used Net Present Value (DCF) method reveals three key issues: 1. Combining high-quality information (near-term cash flow estimates) with low-quality information (distant cash flow forecasts) yields an overall low-quality result—highly sensitive to assumptions; 2. Over-reliance on low-certainty assumptions (e.g., linear extrapolation of distant cash flows, arbitrary discount rates), while overlooking higher-certainty inputs (e.g., industry competitive dynamics and corporate strategy); 3. Discarding valuable information relevant to valuation—such as balance-sheet data reflecting the company’s foundational resource allocation and value-creation infrastructure. How can fundamental quant (‘Quantamental’) investing improve valuation and incorporate these considerations? By thinking like a value investor. As articulated by Columbia Business School professor Bruce Greenwald, the strategic approach to valuation—pioneered by Benjamin Graham and advanced by Warren Buffett—divides enterprise value into three components: asset value, earnings power value, and growth value. Any earnings power value exceeding asset value must be validated by demonstrably *sustainable* competitive advantage; otherwise, competition will ultimately drive asset replacement cost to equal the present value of future profits. Only *durable* competitive advantages generate franchise value—lifting earnings power value above asset value.

Air Products and Chemicals Inc (APD) Shares Rise 8.0%, Trading Above GF Value Estimate

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Air Products and Chemicals Inc shares gained 8.0% to trade at $293.18, exceeding GuruFocus' GF Value estimate of $283.79. Despite a high GF Score of 79/100, lower financial strength and recent insider sales suggest caution.

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