Learning paths through equity valuation
Five ordered paths through the vocabulary every equity report relies on. Each step is a single glossary entry with a definition, formula, and worked examples; the path stitches them together so the order makes sense rather than an A-to-Z dictionary that drops you in the middle.
- Path 1·Beginner·6 terms
Foundations of equity valuation
Start here if you have never put a number on what a stock is worth. Six terms that anchor every valuation conversation: what fair value is, why it is a range, and the cash-on-cash yardsticks that frame multiple-based valuation.
A valuation is a claim about the present value of a future cash stream, expressed as a range. Single-point estimates that ignore the uncertainty in growth, margins, and discount rates are precisely wrong. The six terms here build the vocabulary in the right order: first what fair value and intrinsic value mean, then the simple cash-yield lenses, then the most-cited multiple. By the end you can read a fair-value range and know what it is and is not telling you.
- 01Fair value
What a fair-value range is, and why it is never a single number.
- 02Intrinsic value
Distinguishing intrinsic value (what the business is worth) from price (what the market is paying).
- 03Earnings yield
The intuitive bond-equivalent return on a stock, expressed as 1/PE.
- 04FCF yield
Cash-on-cash return that earnings yield can mask when accruals diverge from cash.
- 05P/E ratio
The most-cited multiple, only meaningful when growth, quality, and capital structure are held in mind.
- 06Margin of safety
How much the price has to be below fair value before it is worth taking the position.
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- Path 2·Intermediate·8 terms
Discounted cash flow, end to end
The DCF is the most-misused valuation tool because every input is a judgment call. This path walks through the eight terms that decide whether a DCF outputs a thesis or a guess: the discount rate, the cash stream being discounted, and the terminal-value mechanics.
A DCF is only as good as its assumptions, and the assumptions cluster around three decisions: what to discount, what rate to discount at, and what terminal value to assign. This path covers all three. You will see why the same model produces wildly different fair values when CAPM inputs shift by 100 basis points, and why the terminal-value calculation usually contributes more than half the total value. The final stop is reverse DCF, the diagnostic that flips the model around to ask what growth the current price is already pricing in.
- 01Discounted cash flow
The framework: discount future free cash flows at a risk-adjusted rate.
- 02Free cash flow to firm
Free cash flow to the firm, the cash stream most DCFs discount.
- 03WACC
Weighted-average cost of capital, the discount rate when valuing the entire firm.
- 04Cost of equity
The discount rate when valuing equity directly.
- 05CAPM
The standard model used to estimate cost of equity from beta, ERP, and the risk-free rate.
- 06Beta
The volatility-against-the-market input, where small changes ripple through the entire valuation.
- 07Terminal value
The largest single input on most DCFs and the place where unjustified optimism hides.
- 08Reverse DCF
The same machinery run backwards to extract the growth rate the current price implies.
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- Path 3·Intermediate·7 terms
Quality and capital efficiency
Two companies can grow earnings at the same rate while compounding capital at very different rates. This path covers the metrics that separate businesses that earn their cost of capital from businesses that destroy value while looking profitable on the income statement.
Earnings growth is not the same as value creation. A company can grow earnings by deploying ever more capital at returns below its cost of capital, and the income statement will not show the leak. This path covers the seven terms that detect that situation: the return-on-capital ratios, the margin stack, and the accounting-quality checks that flag when reported earnings are diverging from cash. You finish with the economic-profit framework, which makes the connection between returns above WACC and shareholder value explicit.
- 01ROIC
The single best summary of capital efficiency: returns earned on the capital already deployed.
- 02Return on equity
Return on equity, before adjusting for leverage.
- 03Operating margin
Profitability before financing and tax effects, the cleanest cross-cohort lens.
- 04Free cash flow margin
Cash margin, useful when accruals (working capital, deferred revenue) move sharply.
- 05OCF/NI ratio
Operating cash flow divided by net income, the first-pass accruals check.
- 06Earnings quality
The composite question: do reported earnings convert to cash with normal lag?
- 07Economic profit
(ROIC minus WACC) times invested capital, the explicit value-creation calculation.
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- Path 4·Advanced·8 terms
Risk, stress, and balance-sheet integrity
Every report should be able to say where the bear case kills the thesis. This path covers the survivability gates and the stress mechanics: solvency scores, leverage diagnostics, sensitivity grids, and the explicit kill-scenario contract used in every analysis.
Risk analysis is not a list of disclaimers; it is the explicit set of conditions under which the bull case fails. This path moves from the survivability gates (Altman Z, Piotroski F, Beneish M) to the leverage and liquidity diagnostics, then to the analytical machinery: sensitivity grids that show how fair value moves with the discount rate, and the kill-scenario contract that names the specific event that would invalidate the thesis. The point is to make risk falsifiable, not vague.
- 01Altman Z-Score
The Altman bankruptcy probability gate, applicable outside financials and REITs.
- 02Piotroski F-Score
Nine-point fundamental-strength gate covering profitability, leverage, and operating efficiency.
- 03Beneish M-Score
Earnings-manipulation flag built from accruals, days-receivable, and gross-margin trends.
- 04Leverage
Net debt divided by EBITDA, the conventional cross-cohort solvency metric.
- 05Interest coverage
EBIT over interest expense, the closest thing to a real-time solvency check.
- 06Sensitivity analysis
How fair value moves when the discount rate or terminal growth shifts by 100 basis points.
- 07Kill scenario
The explicit, falsifiable condition that would invalidate the thesis.
- 08Bear case
The bear case as the structured complement to the bull case, written before the recommendation.
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- Path 5·Advanced·7 terms
Growth, dilution, and forecasting
Growth is what is paid for at the top of the multiple. This path covers the mechanics of forecasting growth honestly: deceleration curves, dilution from stock-based compensation, terminal P/E justification, and the PEG ratio as a reality check on growth-adjusted valuation.
Growth is the most-overpaid input in equity markets because it is the most-extrapolated. Linear extrapolation of recent growth ignores deceleration, dilution silently lowers per-share growth even when revenue grows fast, and the terminal P/E used in any DCF carries a hidden growth assumption of its own. This path links the seven terms that make growth modelling honest: the deceleration curve, dilution mechanics, terminal-multiple justification, and the PEG ratio as a growth-adjusted multiple sanity check.
- 01Revenue growth
Top-line growth, before the dilution and margin-mix effects compound.
- 02EPS growth
Per-share earnings growth, where dilution and buybacks first show up.
- 03Deceleration curve
How fast a hyper-growth rate is assumed to slow toward the terminal rate.
- 04Stock-based compensation
Stock-based compensation, the dilution mechanism that GAAP earnings already capture but per-share growth often masks.
- 05Dilution
The arithmetic that turns aggregate earnings growth into per-share earnings growth.
- 06Terminal P/E
The exit multiple in any DCF, where unstated growth assumptions hide.
- 07PEG ratio
Forward P/E divided by integer-percent growth, the simplest growth-adjusted reality check.
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Looking for a single term?
The full alphabetical glossary lives at /glossary. Each entry has a one-paragraph definition, the formula where one applies, and three to five reports that demonstrate the metric in a real verdict.