How to Value a Company in 2 Minutes with Ratios: Step-by-Step Guide

Stock valuation ratios can help you answer five different questions about a company:

1. How much are investors paying for its operating profit?

2. How efficiently does the business use its capital?

3. How much cash does it generate relative to its market value?

4. Does its financial position show warning signs?

5. Is its valuation supported by expected growth?

In this tutorial, you will answer those questions using the Ratios area in the Forecaster AI Trading Terminal. You will learn how to analyze one stock, compare it with its own history, compare direct competitors and rank the companies inside an index.

Open the Ratios page

After signing in to the Forecaster Terminal, search for the company or ticker you want to analyze and open the stock’s Fundamental Analysis area. Select Ratios to access the five categories available on the page: Valuation, Financials, Financial Health, Solidity and Forward Valuation.

Each ratio includes a short explanation and its formula. Clicking on a value opens the corresponding chart, where you can display the ratio together with the stock price. You can switch between quarterly and annual data, use the trailing-12-month value and select a longer period, such as five or ten years.

The chart can also be downloaded as an image and used in your own analysis or research notes.

Use historical ratios before comparing companies

The current value of a ratio becomes much more useful when you compare it with its own history. By displaying the stock price and the ratio on the same chart, you can see how the market price reacted when the company’s fundamentals changed.

This historical perspective is important because a rising stock price does not necessarily mean that the company has become more expensive. If its operating profit or other fundamental measures improve faster than its market value, the valuation ratio can fall even while the share price rises.

The same ratio can then be used to compare direct competitors. The comparison is most meaningful when the companies operate in the same sector. In the webinar, Visa and Mastercard were used because their businesses are closely related.

Forecaster also allows you to move from an individual stock to the Rankings page of an index such as the S&P 500. From there, you can select a ratio and sort all index components from the largest value to the smallest, or vice versa. This provides a fast way to identify companies that deserve further analysis.

EV/EBITDA: how much are investors paying for operating profit?

The main ratio highlighted in the Valuation category is enterprise value divided by EBITDA.

EV/EBITDA = Enterprise Value ÷ EBITDA

EBITDA stands for earnings before interest, taxes, depreciation and amortization. The ratio tells you how much investors are paying for the company’s operating profit. If a company has an enterprise value of $10 billion and generates $1 billion of EBITDA, its EV/EBITDA is 10. Investors are therefore paying ten times the company’s operating profit.

For this ratio, a lower value is generally preferable. However, the most useful comparison is not based only on today’s number. Open the historical chart and observe where the current EV/EBITDA sits within the company’s previous range.

Nvidia example

At the time of this article, Nvidia had an EV/EBITDA of approximately 38. Although its share price was close to an all-time high, the ratio was near the lower part of its ten-year history. This showed that Nvidia’s fundamental performance had improved alongside the stock price.

The same idea could also be seen in enterprise value to sales, which was in the lower part of its historical range. The example demonstrates why the stock chart and valuation history should be considered together.

Visa and Mastercard example

We also compared Visa and Mastercard. Visa’s EV/EBITDA was close to 25, while Mastercard’s was approximately 21. Based on this ratio alone, investors were paying less for Mastercard’s operating profit.

This does not complete the comparison. It simply answers the first question: which company has the lower valuation relative to EBITDA? The next ratios help show whether that lower or higher valuation is supported by business efficiency, cash generation and expected growth.

ROIC: how efficiently does the company use its capital?

In the Financials category, the highlighted metric is return on invested capital, or ROIC. It shows how efficiently a company uses its capital to generate profit.

For example, if a company invests $1 billion and generates $150 million in profit, its ROIC is 15%. A high ROIC usually indicates a strong and efficient business model. Looking at its history helps you understand whether the quality of the business is improving or deteriorating.

Nvidia’s trailing-12-month return on capital was approximately 74%. The Rankings page could then be used to sort the companies in an index by ROIC and identify businesses with high capital efficiency.

The comparison between Visa and Mastercard was particularly clear. Visa showed a trailing-12-month return on capital of approximately 46%, while Mastercard showed approximately 91%. The two companies may appear similar when viewed only as payment networks, but the ratio revealed a substantial difference in how efficiently they used capital.

A company that maintains a high ROIC over time may also possess a competitive advantage or economic moat. This ratio can therefore complement Forecaster’s Moat Analysis.

Free cash flow yield: how much cash does the company generate?

The Financial Health category highlights free cash flow yield. This ratio shows how much cash a company generates compared with its market value.

If a company is worth $10 billion and generates $800 million in free cash flow, its free cash flow yield is 8%.

The historical chart helps you understand whether the stock is becoming more or less attractive according to its cash generation. You can also open the Rankings page, select Financial Health and sort companies by free cash flow yield.

The webinar included an important warning: a very high free cash flow yield can look attractive, but it may also indicate that the market expects future problems. An unusually high value therefore needs to be investigated rather than treated as an automatic opportunity.

Oracle provided a different example. Its free cash flow had been under pressure, and its free cash flow yield had moved into negative territory. The ratio made it possible to go deeper than the market narrative and examine what was happening to the company’s cash generation.

Visa and Mastercard were again relatively close. In the webinar snapshot, Visa’s free cash flow yield was approximately 0.5%, while Mastercard’s was approximately 0.64%. Mastercard therefore had the higher value for this ratio at that moment.

Check the company’s solidity

The Solidity category includes Altman Z-score, Piotroski F-score and Beneish M-score. These indicators provide an additional view of the company’s financial condition.

The Altman Z-score is presented an indicator connected with bankruptcy probability, while the Piotroski score provide an overall evaluation of the company. Each ratio includes its own description inside Forecaster, and the same indicators can also be used to compare or sort companies in an index.

This section acts as a further check after valuation, capital efficiency and cash generation. Instead of relying on one attractive multiple, you can see whether the company’s solidity indicators support the broader analysis.

PEG ratio: is the valuation supported by expected growth?

The Forward Valuation category uses analysts’ future expectations rather than only current company figures. The highlighted indicator is the PEG ratio, which compares the price-to-earnings ratio with expected earnings growth.

PEG = P/E Ratio ÷ Expected EPS Growth Rate

If a company has a P/E of 30 and expected earnings growth of 30%, its PEG is 1. This means that its valuation is broadly aligned with the expected growth rate.

In general, a lower PEG is preferable because it indicates that investors are paying less for the expected growth. The ratio is useful because it introduces a forward-looking perspective into the analysis.

The Visa and Mastercard comparison changed when viewed through PEG. In the webinar, Visa had a PEG of approximately 6, while Mastercard had a PEG of approximately 7.28. Mastercard had shown stronger ROIC and a slightly higher free cash flow yield, but investors were paying more for its expected growth.

This is precisely why several ratios are needed. One company can appear better according to business efficiency while another appears less expensive relative to analysts’ growth expectations.

Micron example

Micron demonstrated how current valuation and expected growth can produce different messages. Its EV/EBITDA was close to the high end of its historical range, suggesting that the current valuation required attention. At the same time, its PEG was approximately 0.55, reflecting very strong growth expectations from analysts.

The ratio did not remove the risk created by the high EV/EBITDA. It showed that the market’s valuation had to be considered together with the growth expected for the company.

A two-minute ratio workflow

Once you are familiar with the interface, the analysis can be summarized in four quick checks:

Open Valuation and compare EV/EBITDA with the company’s history.
Open Financials and check whether ROIC is high and improving.
Open Financial Health and review free cash flow yield.
Check Solidity and finish with the forward-looking PEG ratio.

After these checks, open the relevant index in Rankings and compare the company with direct competitors using the same ratios. The goal is not to obtain an automatic buy or sell signal. It is to understand how valuation, business efficiency, cash generation, solidity and expected growth fit together.

Continue learning with Forecaster

The Ratios page combines current values, formulas, historical charts, stock-price comparisons and index rankings in one workflow. You can repeat the process on a company you already follow and then compare it with its closest competitors.

More platform walkthroughs are available in the Forecaster tutorial library. You can also explore the complete Forecaster platform and review the available pricing plans.