How to value stocks by company type?
The second most important thing in investing in the stock market is deciding what the fair value of an asset is (the most important being 🧠 mental toughness).
Choosing the right valuation model you use to come up with this fair value depends on the type of company you’re looking at. Mature companies, high-growth disruptors, dividend payers, and early-stage firms all behave differently, and the valuation model should reflect that.
In this guide, we’ll break down how to value common types of public companies using the some popular valuation methods:
Discounted Cash Flow (DCF)
PEvaluation (a custom market model based on fair P/E multiples) - described in detail here.
Graham Formula with Growth (based on earnings and expected growth, not book value)
Future P/E Valuation
Dividend Discount Model (DDM)
All of these tools, and more, are available for free on pevaluator.com
Let’s explore how each model applies best depending on the type of company you’re analyzing, be it mature, stable companies, high-growth or pre-profit, or companies with a good dividend record.
1. Mature Companies
These are businesses with stable earnings, consistent cash flow, and operate in well-established markets. (Johnson & Johnson, Coca-Cola, IBM)
Best valuation methods:
Discounted Cash Flow (DCF): Their predictable cash flows make DCF a reliable tool.
PEvaluation: With steady fundamentals, assigning a fair P/E multiple based on metrics like ROIC or margins yields meaningful valuations.
Graham Formula with Growth: Offers a simple yet effective way to estimate fair value based on current EPS and expected growth.
Maybe suitable:
DDM: only if the company has a stable and consistent dividend
Less suitable:
Future P/E Valuation: The company’s future growth might not justify significant upside.
2. Growth Companies
Growth companies are expanding revenue and earnings quickly and are often priced for future potential. (Nvidia, Shopify, MercadoLibre)
Best valuation methods:
Future P/E Valuation: Ideal for projecting future earnings and discounting them back to today.
DCF: Useful if free cash flow is positive and scalable, though inputs may vary.
PEvaluation: Can work well if current earnings are strong enough to be valued using a forward-looking multiple.
Maybe suitable:
Graham Formula with Growth: Often too conservative, even with growth baked in.
Less suitable:
DDM: Rarely appropriate, since these companies typically reinvest earnings.
3. Early-Stage Companies
These are often pre-profit companies with uncertain cash flow and rapidly evolving business models. (early biotech firms, startups post-IPO)
Best valuation methods:
Future P/E Valuation: When future margins and revenue are reasonably predictable, this model provides a structured way to think about future value.
Maybe suitable:
PEvaluation: Can be useful if one can estimate future earnings with a relatively high degree of confidence and the model focuses on growth metrics.
Less suitable:
DCF: Too speculative without stable cash flow.
Graham Formula with Growth: Relies on positive EPS—usually unavailable.
DDM: Not applicable—these companies don’t pay dividends.
4. Dividend-Paying Companies
These companies prioritize shareholder returns through dividends and often operate in stable industries. (Procter & Gamble, AT&T, PepsiCo)
Best valuation methods:
Dividend Discount Model (DDM): A direct fit when dividend history is consistent and predictable.
Less suitable:
PEvaluation: Works well in tandem with dividend metrics like payout ratio and dividend growth.
DCF: OK if you want to model both dividends and retained free cash flow.
Less suitable:
Future P/E Valuation: Less helpful unless the company has meaningful earnings growth on the horizon.
Graham Formula with Growth: Can provide a ballpark fair value, but often not very meaningful.
Ready to Value Stocks with Confidence?
Our platform makes it easy to apply the right valuation method for the right kind of business. Whether you’re analyzing steady dividend payers or building projections for next-gen innovators, we’ve got the tools:
PEvaluation: Build your own fair P/E model using metrics like ROIC or profit margins (Join for FREE and create your market model)
DCF calculator, using either a terminal growth rate or an exit P/FCF multiplier (available without an account)
Future P/E Model: Forecast revenue growth, net margin, fair P/E, and reach fair price estimates
Graham Formula with Growth calculator - simply input earnings and growth rate
Dividend Discount Model calculator: Instantly compute fair prices for dividend paying stocks
Side-by-Side Comparisons: Quickly evaluate multiple scenarios to refine your estimates
👉 Try it free now and unlock smarter investing through better valuations.