Key metrics

There is a large number of valuation proxies computed from fundamental data. These factors can be combined as inputs into a machine learning valuation model to predict prices. We will see examples of how some of these factors are used in practice in the following chapters:

Factor

Description

Cash flow yield

The ratio divides the operational cash flow per share by the share price. A higher ratio implies better cash returns for shareholders (if paid out using dividends or share buybacks, or profitably reinvested in the business).

Free cash flow yield

The ratio divides the free cash flow per share, which reflects the amount of cash available for distribution after necessary expenses and investments, by the share price. Higher and growing free cash flow yield is commonly viewed as a signal of outperformance.

Cash flow return on invested capital (CFROIC)

CFROIC measures a company's cash flow profitability. It divides operating cash flow by invested capital, defined as total debt plus net assets. A higher return means the business has more cash for a given amount of invested capital, generating more value for shareholders.

Cash flow to total assets

This ratio divides operational cash flow by total assets and indicates how much cash a company can generate relative to its assets, where a higher ratio is better similar as for CFROIC.

Free cash flow to enterprise value

This ratio measures the free cash flow that a company generates relative to its enterprise value, measured as the combined value of equity and debt.

EBITDA to enterprise value

This ratio measures a company's EBITDA (Earnings before interest, taxes, depreciation, and amortization), which is a proxy for cash flow relative to its enterprise value.

Earnings yield (1 Yr trailing)

This ratio divides the sum of earnings for the past 12 months by the last market (close) price.

Earnings yield (1 Yr forward)

Instead of actual historical earnings, this ratio divides a rolling 12 month forward consensus analyst earnings estimate by the last price, where consensus consists in a (possibly weighted) average of forecasts.

PEG ratio

The Price/Earnings to Growth (PEG) ratio divides a stock's price-to-earnings (P/E) ratio by the earnings growth rate for a given period. The ratio adjusts the price paid for a dollar of earnings (measured by the P/E ratio) by the company's earnings growth.

P/E 1 Yr Forward Relative to sector

Forecast P/E ratio relative to the corresponding sector P/E. It aims to alleviate the sector bias of the generic P/E ratio by accounting for sector differences in valuation.

Sales yield

The ratio measures the valuation of a stock relative to its ability to generate revenues. All else equal, stocks with higher historical sales to price ratios are expected to outperform.

Sales yield FY1

The forward sales to price ratio uses analyst sales forecast, combined to a (weighted) average.

Book value yield

The ratio divides the historical book value by the share price.

Dividend yield

The current annualized dividend divided by the last close price. Discounted cash flow valuation assumes a company's market value equates to the present value of its future cash flows.

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