How to value listed companies in different industries?

Previously：
Absolute valuation: Analysts' secret weapon
Relative valuation: How to compare a stock's worth with its peers?
Stock valuation methods

There are 2 methods for analysts to give enterprises valuations: absolute valuation and relative valuation. How to value listed companies in different industries?

Absolute Valuation

Dividend Discount Model (DDM)

The dividend discount model(DDM) calculates the "true" value of a firm based on the dividends the company pays its shareholders.

DDM is a very effective way of valuing matured blue chip companies in well-developed industries. These companies have to pay a dividend, and the dividend is stable and predictable.

Discounted Cash Flow Model (DCF)

If the company doesn't pay a dividend or its dividend pattern is irregular, then the company should use the discounted cash flow (DCF) model.

DCF is a calculation designed to evaluate a company's current value by projecting its future free cash flows, operating costs, revenues, and growth.

But these values are easier to accurately predict with larger, more firmly established companies that have steady growth histories on which to base these projections, such as utilities, banking, and energy sectors like oil and gas.

Relative Valuation

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

P/E ratios are used by investors to determine the relative value of a company's shares in the same sector. It can also be used to compare a company against its own historical record or to compare aggregate markets against one another or over time.

Companies that have no earnings or that are losing money do not have a P/E ratio since there is nothing to put in the denominator.

Learn more: How to value a stock with the P/E ratio？

Price-to-Sales Ratio (P/S ratio)
P/S ratio can be applied in valuing growth stocks that have yet to turn a profit or have suffered a temporary setback.

Especially in the semiconductor industry and some other cyclical industries, many companies don't generate any profits.

Learn more: How to value a stock: Price-to-sales ratio (P/S) explained

Enterprise Multiples
When an assessment is needed on a merger and acquisition, enterprise value multiples are the more appropriate multiples to use, as they eliminate the effect of debt financing.

Enterprise Multiples includes total debt, so it's important to consider how the debt is being utilized by the company's management.

For example, capital intensive industries such as the oil and gas industry typically carry significant amounts of debt, which is used to foster growth. The Enterprise multiples method is mainly applicable to these industries.