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Guide10 min read

Stock Valuation Methods: A Complete Comparison Guide

Compare the main stock valuation methods: DCF, P/E, PEG, Graham Number, and DDM. Learn when to use each, their strengths and weaknesses, and how to combine them.

Meet Dhanani
By Meet Dhanani

Senior Software Engineer at Red Hat

There’s no single “best” way to value a stock. Each method captures different aspects of a company’s value, and the smartest approach combines multiple models. This guide compares the major valuation methods side-by-side to help you choose the right tool for each situation.

The Five Primary Methods

1. Discounted Cash Flow (DCF)

What it measures: Present value of all future free cash flows

Formula: Sum of [FCF × (1+g)^n / (1+r)^n] + Terminal Value

Inputs needed:

  • Current free cash flow
  • Growth rate assumption
  • Discount rate
  • Terminal growth rate

Best for:

  • Mature, profitable companies with predictable FCF
  • Companies you plan to hold long-term
  • Any company with positive free cash flow

Weakness: Highly sensitive to growth and discount rate assumptions. Small input changes = big output swings.

Try the DCF Calculator →

2. Price-to-Earnings (P/E) Ratio

What it measures: How much investors pay per dollar of earnings

Formula: Stock Price / Earnings Per Share

Inputs needed:

  • Current stock price
  • Trailing or forward EPS

Best for:

  • Quick comparison within sectors
  • Screening large universes of stocks
  • Stable, profitable companies

Weakness: Ignores growth, debt, and cash flow quality. Can be manipulated through accounting.

Try the PE Ratio Calculator →

3. PEG Ratio

What it measures: P/E ratio adjusted for earnings growth rate

Formula: P/E Ratio / Annual Earnings Growth Rate (%)

Inputs needed:

  • P/E ratio
  • Expected earnings growth rate

Best for:

  • Comparing growth stocks to each other
  • Determining if a high P/E is justified
  • Technology and healthcare sectors

Weakness: Meaningless for declining earnings. Assumes growth rate is accurately known.

Try the PEG Ratio Calculator →

4. Graham Number

What it measures: Maximum price for a conservative value investor

Formula: √(22.5 × EPS × Book Value Per Share)

Inputs needed:

  • Earnings per share
  • Book value per share

Best for:

  • Deep value screening
  • Financial companies where book value is meaningful
  • Setting a conservative price ceiling

Weakness: Completely ignores growth. Undervalues asset-light tech companies with low book value.

Try the Graham Number Calculator →

5. Dividend Discount Model (DDM)

What it measures: Present value of all future dividend payments

Formula: Next Year’s Dividend / (Discount Rate - Dividend Growth Rate)

Inputs needed:

  • Current dividend
  • Expected dividend growth rate
  • Required rate of return

Best for:

  • Stable dividend-paying companies
  • Utilities, REITs, consumer staples
  • Income-focused investors

Weakness: Useless for non-dividend payers. Values $0 for growth companies reinvesting everything.

Head-to-Head Comparison

Method Complexity Accuracy Growth Capture Risk Assessment Universal
DCF High Highest Yes Via discount rate Most stocks
P/E Low Moderate No No Profitable only
PEG Low Moderate Yes No Growing only
Graham Low Conservative No Via book value Profitable only
DDM Medium High (for dividends) Partially Via discount rate Dividend payers only

Which Method for Which Stock?

High-Growth Tech (NVDA, META, AMZN)

Primary: DCF (40%), PEG (40%) Secondary: P/E comparison to peers (20%) Skip: Graham Number (book value is meaningless), DDM (no/minimal dividends)

Stable Blue Chip (JNJ, PG, KO)

Primary: DCF (30%), DDM (30%) Secondary: P/E (20%), Graham Number (20%) All methods work here: these are ideal valuation candidates.

Financial Company (JPM, GS, BRK)

Primary: Graham Number (35%), P/E (35%) Secondary: DCF (20%), DDM (10%) Note: Book value is meaningful for banks; DCF is harder due to complex cash flows.

High-Dividend Utility (NEE, DUK, SO)

Primary: DDM (40%), DCF (30%) Secondary: P/E (20%), Graham Number (10%) Note: Dividend growth rate is highly predictable, making DDM very reliable.

Cyclical Company (XOM, CAT, F)

Primary: DCF (40%, use mid-cycle FCF), P/E (30%, use normalized earnings) Secondary: Graham Number (30%) Caution: Don’t use peak-cycle earnings; normalize across the cycle.

Pre-Profit Growth (early-stage, negative earnings)

Primary: DCF (if FCF is positive) or Revenue-based models Skip: P/E, PEG, Graham (all require positive earnings) Note: These are hardest to value; apply large margin of safety.

The Composite Approach

No single model captures the full picture. The most reliable fair value estimate combines multiple methods:

Model Weight Rationale
DCF 40% Most comprehensive, forward-looking
Graham Number 25% Conservative floor, time-tested
PEG 25% Growth-adjusted perspective
DDM 10% Relevant for dividend payers

Our composite formula:

Composite Fair Value = (DCF × 0.40) + (Graham × 0.25) + (PEG Fair Value × 0.25) + (DDM × 0.10)

This is exactly what our intrinsic value calculator computes automatically.

Common Mistakes When Combining Models

  1. Equal weighting everything: Not all models are equally relevant for every stock. Weight based on applicability.

  2. Ignoring a model that gives a low number: If 3 models say $100 but Graham says $50, investigate why. The conservative estimate may be revealing something.

  3. Using stale data: Update all models with the same quarter’s financial data. Mixing Q1 and Q3 data is meaningless.

  4. Anchoring to one model: If your “favorite” model gives a high number, resist the urge to overweight it.

  5. Forgetting margin of safety: The composite estimate is still an estimate. Apply 20-30% margin before buying.

A Practical Valuation Workflow

  1. Gather data: Latest EPS, FCF, book value, dividend, growth rate
  2. Run all applicable models using our calculators
  3. Weight results based on company type
  4. Check for divergence: if models wildly disagree, investigate why
  5. Apply margin of safety (20-30%)
  6. Compare to market price: buy only below your discounted fair value

Start Valuing Stocks

Try It Yourself

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