The simple way I generally think about valuation, a very short thread:

As Charlie would say: invert, always invert. That’s what I try to do when looking at valuation metrics. Nothing new here. But earnings yields based on EBIT/EV or E/P ex-cash (if there is a net cash position) give you a good sense of the expected no-growth annualized return.

Of course you need to get a good sense of the earnings stability and/or recurrence. History helps. Business analysis helps. Some industries are less cyclical than others...At the end of the day, stability is key.

But there are more than one way to skin a cat. My hurdle is 10% (net of tax). If I have a starting no-growth net earnings yield of 7%, I therefore need a sustainable growth of ca. 7% to get to my 10% within 5 years (that’s my timeframe).

I therefore look at ROE*(1-payout) to get a better sense of the expected book value / earnings growth. I also look at the last 10-year growth history to see whether the company can do it.

Based on my own experience, I now try to buy good companies at a multiple no higher than their last 5-10 year average (to avoid a brutal de-rating). And I’d rather start with a no-growth earnings yield no lower than 6-7%. If I can get 10% with no growth, that’s fine too.

There are exceptions as always. But this has been my general approach and I’ve been happy with it.

Last but not least, I apply this approach to and try to invest mostly in well-run family-owned small companies with low or no debt.