How we value stocks
We value every stock mechanically, with no analyst discretion. First we decide what kind of company it is, because that decides which models make sense. This page explains each model, how we combine them, and, the part that matters more, where each one stops working and why we switch it off there.
The short version. A fair value is a confidence-weighted blend of the models that suit that particular business, and every value carries a confidence label: Good, Medium or Low. A bank is not valued on free cash flow and a software company is not valued on book equity. Where a model cannot value a company, we leave it out rather than fudge it.
What kind of company is it?
Before any model runs, we sort each company into a type from its sector, industry and filed accounts. The type decides which models run, in this order of priority. If none of a type’s models has the data it needs, we try the others and label the result Low.
| Company type | Models used |
|---|---|
| Bank | Residual incomeP/E comparablesShareholder yieldGraham number |
| Insurer | Residual incomeP/E comparablesShareholder yield |
| Asset manager | P/E comparablesShareholder yieldResidual income |
| Fund or holding company | Net asset valueShareholder yieldP/E comparables |
| REIT | P/FFOShareholder yieldEV/EBITDA comparables |
| Utility | Shareholder yieldP/E comparablesEV/EBITDA comparablesTwo-stage DCF |
| Mature business | Two-stage DCFP/E comparablesEV/EBITDA comparablesGraham numberShareholder yield |
| Growth business | Two-stage DCFP/S comparablesP/E comparablesEV/EBITDA comparables |
| Cyclical | P/E comparablesEV/EBITDA comparablesTwo-stage DCFGraham number |
| Loss-making | P/S comparablesAnalyst targetNet cash floor |
| Pre-revenue | Net cash floorAnalyst target |
The reverse DCF runs on every company, but only as a check: it never votes.
The models
Eleven models can produce a fair value. A twelfth, the reverse DCF, produces no valuation at all: it reads the market’s own assumption back out of the price.
Two-stage DCF
What is the cash this business will produce, in today’s money?
Ten years of projected free cash flow discounted at the cost of equity, then a terminal value at 2.5% growth. Growth glides from the company’s own filed revenue growth down to the terminal rate rather than dropping off a cliff. Slowing growth frees cash only up to the company’s actual profit. Growth is charged for the capital it consumes (g = ROIC × reinvestment) and capped at the return on capital. The starting cash flow is normalised: through-cycle margins for cyclicals, the latest year when cash flow has stepped up, and maintenance cash flow when growth spending depresses the reported figure. Growth is held between −10% and 25%. The discount rate is a cost of equity built from the sector’s beta adjusted for the company’s debt, a country risk premium, and a size premium of 3% below $300m and 1% below $2bn of market value.
Where it stops. It cannot value a business the market prices far above what a ten-year window plus a 2.5% perpetuity can produce. At a 10.5% cost of equity the model pays about 12.5× free cash flow at 2% growth and 21× at 15%. A company trading at 45× is not necessarily mispriced: the market may be underwriting durability the frame cannot express. It is not used for banks, insurers, asset managers, funds or REITs.
Reverse DCF
What is the market already assuming?
Runs the same machinery backwards: it solves for the growth rate that would justify the current price, then compares it with what the company has actually delivered. It never votes in the consensus: it is an anchor, not an opinion.
Where it stops. The terminal value breaks as growth approaches the discount rate, so a ten-year solve cannot represent prices that imply high growth for longer. Where that happens we report the implied perpetual growth instead, which is always solvable, and label it as such.
P/E comparables
What do similar companies trade at?
The market’s own pricing of comparable businesses, applied to this company’s earnings. Earnings are normalised so that one exceptional year does not set the value. It needs no forecast of its own, which makes it a useful counterweight to the DCF.
Where it stops. It assumes the company deserves the sector median. For a business whose growth or margins diverge sharply from its peers, that assumption is doing all the work. It also inherits whatever the sector is currently mispricing.
EV/EBITDA comparables
What would an acquirer pay for the whole business?
Capital-structure neutral, so it compares a debt-heavy company with a debt-free one on the same basis, then bridges back to equity by subtracting net debt.
Where it stops. EBITDA ignores capital intensity, so it flatters businesses that must constantly reinvest. It is not used for lenders, and it is left out of the blend when net debt is above 5× EBITDA, where the equity left after debt is too thin to value this way.
Graham number
What would a strict value investor pay?
Benjamin Graham’s rule of thumb: no more than 15× earnings and 1.5× book, multiplied together. Deliberately old-fashioned and deliberately conservative.
Where it stops. It was designed for asset-heavy industrials, before intangibles dominated balance sheets. So we only run it for banks, mature businesses and cyclicals, at a lower confidence than the other models, and when it lands below a quarter of the price it is rated Low.
Residual income
Does this business earn more than its capital costs?
Book value plus the present value of returns earned above the cost of equity. A company earning exactly its cost of equity is worth its book value and nothing more, however fast it grows. This is the standard frame for banks and insurers, whose assets are largely financial instruments carried near fair value. Long-run growth is capped at 3% and kept at least 3 points below the cost of equity.
Where it stops. It runs on banks, insurers and asset managers only. For an asset-light business, buybacks and unrecognised intangibles leave book equity far below economic capital, so the model would read almost anything as expensive. Property fails the other way: a REIT’s book value is depreciated historical cost, well under market.
Shareholder-yield discount model
What is the cash actually returned to owners worth?
A Gordon model on total shareholder yield: dividends plus net buybacks, measured from the change in diluted share count. For most large caps repurchases return more cash than the dividend, and an owner is indifferent to the form it takes.
Where it stops. A single-stage perpetuity is only meaningful for a mature business returning most of its profit. It is excluded from the consensus below a 2.5% total yield, where the cash return is not what drives the value.
P/S comparables
What do similar companies pay for each dollar of sales?
For companies that do not make a profit yet, sales are the most reliable number left. We apply what comparable companies are paid for their sales.
Where it stops. Sales say nothing about whether a business will ever be profitable. We only use it for loss-making companies with at least 10 million in revenue that is still growing, and at low confidence.
Net cash floor
What is the cash in the bank worth per share?
A floor rather than a fair value: what a shareholder would get if the company stopped today and returned its net cash.
Where it stops. It ignores everything the business might become. We only use it for loss-making and pre-revenue companies whose net cash is at least a quarter of the share price, and only when the balance sheet is less than about 15 months old.
Analyst target
Where do professional analysts see the price?
The average target published by sell-side analysts, used as one more opinion for companies our other models cannot reach.
Where it stops. It is someone else’s opinion, so it gets low confidence. We only use a target restated in the last 90 days and between 0.2× and 5× the price, and it can never set a headline fair value on its own.
P/FFO
What is a property company’s cash earnings power worth?
Funds from operations add back the property depreciation that makes a REIT’s reported earnings misleading. We apply the median multiple of other REITs.
Where it stops. When there are not enough peers, it falls back to 15× and carries lower confidence. It is used for REITs only.
Net asset value
What are the assets inside the fund worth?
A fund or holding company is worth the assets it holds. For these, book value is close to the market value of those assets.
Where it stops. It assumes the holdings are carried near market value. It is used for funds and holding companies only.
How the models are combined
Each model rates its own confidence for the company in front of it. Models rated Medium or better vote, weighted by their confidence, and two of them make a Good fair value. One is enough when a second model, rated just below Medium, lands within twice its value and within four times the price; that second model then carries at most a third of the blend.
A model that says the stock is worth more than four times its price, or less than a quarter of it, is rated Low. We drop a model outright only when its value is impossible (more than eleven times the price, which points to a data fault) or when it has not been refreshed for 30 days.
Confidence labels
Every fair value carries a label. Good means the rule above is met. Medium means only one of our sounder models could value the company. Low means the value rests on weaker models, sales multiples or analyst targets, so it is a rough guide.
A loss-making or pre-revenue company can get a Low value from two fill-in models (sales comparables, net cash floor, analyst target) when they sit within four times the price and within twice each other, with sales comparables as one of them. Stock pages and the screener show all three labels. Alerts, posts, emails, picks, indices and the fair-value history use Good values only.
Currencies
A company can report its accounts in one currency and trade in another. Some venues also quote in a sub-unit: London quotes in pence, Johannesburg in cents and Tel Aviv in agorot, a factor of 100 each.
Both are handled before any model runs. The price and the market value are converted into the currency of the financial statements, so every model works in one unit, and per-share results are converted back so the fair value is in the same currency as the price beside it. Where the pairing cannot be established, the affected models are left out rather than guessed at.
How often values update
Our valuation run goes through the covered universe three times a day. Every valued stock is recalculated at least every seven days, and a company that has just reported moves to the front of the queue. A model that has not been refreshed for 30 days stops voting.
The ACCE price target is a different number
Each stock page shows two figures. The model fair value is everything above: the consensus of the valuation models. The ACCE price target is our own analyst-style target, produced with the help of AI that reads far more filings, data and text than a person could, and dated with “Last updated”. It is not part of the model fair value. We hide it once the price has moved more than 40% since it was set.
Summaries on stock pages
Some short summaries on stock pages are written with AI and labelled as such. Any figure they mention is taken from the page itself, so it always matches the numbers you see.
Recent changes
October 2026
- Each company is now sorted into a type, and the type decides which models run.
- New models for companies our older models could not reach: loss-making companies, REITs, funds and holding companies.
- Cash flow and earnings are normalised, so one unusual year does not set the value.
- Every fair value carries a Good, Medium or Low label, and every model is shown with its confidence.
- The DCF now glides over ten years instead of five, and slowing growth can only release cash up to the company’s profit. Many fair values moved, most of them down.
What this is not
These model outputs are not forecasts. A mechanical fair value is a statement about what a set of standard assumptions implies, and the gap between it and the market price is often a statement about how hard a business is to model rather than a view on the business itself. A company can trade well above every model’s output for years and be right to.
Nothing here is investment advice, and no model output should be read as a recommendation. See the disclaimer.
See it applied
The market valuation snapshot aggregates this engine across the whole covered universe, by sector, country and exchange, and every company page shows each model’s output, its assumptions, and whether it was included in the blend.