How People Value Stock Over-Time Has Changed

Luke Lloyd
Apr 23
7 min read

Updated: 5 days ago

Simple Ways to Value a Stock — And How the Art Has Evolved Over Time

Valuing a stock is one of the most fundamental — and most debated — exercises in all of finance. At its core, the question is deceptively simple: What is this company actually worth? Yet the methods investors use to answer that question have shifted dramatically over the decades, shaped by new theories, new technologies, and hard lessons from market booms and busts.

Let’s walk through the most common valuation approaches, from the simplest to the more nuanced, and trace how the practice has evolved over time.

1. The Price-to-Earnings (P/E) Ratio: The Timeless Starting Point

What it is: The P/E ratio divides a company’s stock price by its earnings per share (EPS). A stock trading at $100 with $5 in EPS has a P/E of 20x — meaning investors are paying $20 for every $1 of earnings.

Why it matters: It gives you a quick snapshot of how “expensive” a stock is relative to what it earns. A lower P/E may suggest a bargain; a higher P/E may reflect high growth expectations.

How to use it:

Compare a stock’s P/E to its industry peers
Compare it to the stock’s own historical P/E range
Compare it to the broader market (the S&P 500’s long-term average P/E has hovered around 15-17x, though it has spent extended periods well above that)

Limitations: P/E can be misleading for companies with volatile, negative, or artificially inflated earnings. It also tells you nothing about debt, cash flow, or growth trajectory.

2. The Price-to-Book (P/B) Ratio: The Value Investor’s Classic

What it is: P/B compares a stock’s market price to its book value (total assets minus total liabilities, per share). A P/B of 1.0 means you’re paying exactly what the company’s net assets are worth on paper.

Why it matters: This was the cornerstone of Benjamin Graham and David Dodd’s Security Analysis (1934) — the bible of value investing. Graham famously sought stocks trading below book value, viewing them as a “margin of safety.”

The evolution: In the industrial age, book value was a reliable anchor because companies were asset-heavy (factories, railroads, inventory). Today, many of the world’s most valuable companies — think software, biotech, and platform businesses — carry minimal tangible assets. Their value lies in intellectual property, brand equity, and network effects, none of which appear on the balance sheet at fair value. As a result, P/B has become less useful as a standalone metric for asset-light businesses, though it remains relevant for banks, insurers, and real estate companies.

3. Discounted Cash Flow (DCF): The Theoretical Gold Standard

What it is: A DCF model estimates the present value of all future free cash flows a company is expected to generate, discounted back at an appropriate rate (typically the weighted average cost of capital, or WACC).

Why it matters: Unlike ratio-based methods, DCF attempts to calculate an intrinsic value from first principles. It forces you to think about growth rates, margins, reinvestment needs, and risk.

Historical context: While the concept of discounting future income dates back centuries, DCF became a mainstream corporate finance tool after the work of John Burr Williams (The Theory of Investment Value, 1938) and was later formalized in business school curricula through the capital asset pricing model (CAPM) in the 1960s. The rise of spreadsheet software in the 1980s and 1990s made DCF modeling accessible to a much wider audience.

Limitations: A DCF is only as good as its assumptions. Small changes in the discount rate or terminal growth rate can swing the output by 30% or more. As the saying goes: “Garbage in, garbage out.”

4. Price-to-Sales (P/S) Ratio: The Growth Investor’s Friend

What it is: P/S divides market capitalization by total revenue. It’s especially useful for companies that are not yet profitable but are growing rapidly.

Why it matters: During the dot-com era of the late 1990s, P/S became a go-to metric because many internet companies had no earnings (and sometimes barely any revenue). Investors needed something to anchor valuations, and revenue was the most tangible figure available.

The evolution: P/S saw a major resurgence during the 2020-2021 growth stock boom, when companies with P/S ratios of 30x, 50x, or even 100x attracted enormous capital. The subsequent correction in 2022 served as a reminder that revenue without a credible path to profitability can be a dangerous foundation for valuation.

5. EV/EBITDA: The Analyst’s Workhorse

What it is: Enterprise Value (market cap + debt - cash) divided by EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). This metric became the standard in leveraged buyout (LBO) analysis in the 1980s and has since become one of the most widely used valuation multiples among professional analysts.

Why it matters: By using enterprise value instead of just market cap, EV/EBITDA accounts for a company’s capital structure (debt and cash). By using EBITDA, it strips out non-cash charges and financing decisions, making it easier to compare companies across different tax jurisdictions and capital structures.

Best for: Comparing companies within the same industry, evaluating acquisition targets, and analyzing capital-intensive businesses.

6. Dividend Discount Model (DDM): The Income Investor’s Lens

What it is: The DDM values a stock as the present value of all expected future dividends. The simplest version — the Gordon Growth Model — assumes dividends grow at a constant rate forever.

Historical context: For much of the 20th century, dividends were the primary reason to own stocks. The DDM was a natural and intuitive framework. However, as more companies shifted toward reinvesting earnings (and later, share buybacks) rather than paying dividends, the DDM’s applicability narrowed. Today, it remains most relevant for mature, dividend-paying companies in sectors like utilities, consumer staples, and real estate investment trusts (REITs).

How Stock Valuation Has Changed Over Time

Key Shifts to Understand

From tangible to intangible: The economy has shifted from factories and railroads to software and intellectual property. Valuation methods have had to adapt because traditional balance sheets understate the true asset base of modern companies.
From backward-looking to forward-looking: Early methods relied heavily on historical data. Modern valuation increasingly emphasizes projected growth, total addressable market (TAM), and scenario analysis.
From single metrics to multi-factor frameworks: No serious analyst today relies on a single ratio. Best practice involves triangulating across multiple methods — a P/E check, a DCF model, a comparable company analysis, and a qualitative assessment of competitive positioning.
From exclusive to democratized: Valuation tools that once required a Bloomberg terminal and an MBA are now accessible to retail investors through free financial data platforms and AI-powered analysis tools.
The rise of “narrative and numbers”: Popularized by NYU professor Aswath Damodaran, this approach recognizes that every valuation is ultimately a story about a company’s future, translated into numbers. The narrative shapes the assumptions; the numbers discipline the narrative.

Practical Takeaways for Everyday Investors

No single metric tells the whole story. Use P/E for a quick sanity check, but dig deeper with cash flow analysis and peer comparisons.
Context is everything. A P/E of 30x might be cheap for a company growing earnings at 40% annually, and expensive for one growing at 5%.
Beware of “new era” thinking. Every bubble has been justified by claims that traditional valuation no longer applies. It always does — eventually.
Match the method to the company. Use DDM for dividend payers, EV/EBITDA for capital-intensive firms, P/S for early-stage growth companies, and DCF when you want to build a full thesis.
Focus on what you can understand. The best valuation method is the one whose assumptions you can critically evaluate. If you cannot explain why a company deserves a 50x multiple, you probably should not be paying it.

Stock valuation is part science, part art, and part temperament. The tools have grown more sophisticated over the past century, but the core question remains unchanged: Are you getting more than you are paying for? Master a few simple methods, understand their limitations, and you will be far better equipped than most investors to answer that question with confidence.

Click here to schedule a meeting — I’m here to help you take the next step toward financial freedom.

Colin Symons, CIO Lloyd Financial Group

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