“Is This Stock ‘Too Expensive’?” A Beginner’s Guide to Valuations

The “is it already too late?” feeling is so real.

You see a stock that’s already doubled, and your brain does the thing: Did I miss it? Is it too expensive now?

But here’s the twist: a stock can feel “too expensive” and still keep climbing. And it can look “cheap” and go absolutely nowhere for ages. That’s why learning valuation isn’t about becoming a market-timing wizard. It’s about asking better questions before you hand over your money.

What “Expensive” Really Means

A high share price doesn’t automatically mean a stock is expensive. A €1,000 share can be “cheap” and a €5 share can be “pricey.”

What matters is price compared to the company’s fundamentals: earnings (profit), sales (revenue), and cash flows.

A simple example:

If Company A has a share price that’s 10 times what it earns per share each year, and Company B has a share price that’s 30 times what it earns per share, investors are paying three times as much for each euro of profit in Company B.

Many investors start with quick ratios like P/E (price-to-earnings) and P/S (price-to-sales) because they provide a quick reality check: “What am I paying relative to what the company is actually performing?”. Think of them as a first filter - not a definitive answer.

Three Core Valuation Tools

a) P/E (Price-to-Earnings) ratio

So what does P/E actually tell you? P/E tells you how many euros investors are willing to pay for €1 of annual profit.

Simple example:

A company earns €5 per share and trades at €50 per share.

€50 ÷ €5 = P/E of 10.

You’ll often see two versions of this:

• Trailing P/E, which uses the profits the company has already made over the last 12 months.
• Forward P/E, which uses analysts’ estimates of the profits for the next 12 months. That one is usually more interesting for investors, because markets are always pricing in what they think will happen next, not what just happened.

One quick “temperature check” for the market: The S&P 500’s forward P/E is about 24.1 as of early December 2025- above its 5‑ and 10‑year averages and also above its longer‑term 30‑year average.

In other words, investors today are paying more for each €1 of expected profit than they have, on average, in the past - which suggests the market isn’t “cheap,” but also doesn’t tell you it’s about to crash tomorrow

Also: some fast-growing tech and AI names trade at much higher P/Es because investors expect strong future growth. Sometimes they’re right. Sometimes they’re paying for a very optimistic story.

b) Price-to-Sales (P/S) ratio

If profits are small, volatile, or just not the main story yet, investors often switch to sales.

P/S compares the company’s market value to its annual revenue and is often used for younger or lower-profit companies where earnings are small or messy.

Simple example:

A company with €1 billion in revenue and a €5 billion market cap has a P/S of 5.

For example, Nvidia has recently traded around ~22x sales (P/S). Meanwhile, the S&P 500 has been around ~3.424x sales.

That huge gap is the market basically saying: “I’ll pay way more for each €1 of Nvidia’s revenue than I will for the average company’s revenue.” It’s not automatically wrong. It’s just a high bar to clear.

c) PEG ratio (P/E relative to growth)

Okay, but what if a stock has a high P/E because growth really is strong?

PEG is “P/E adjusted for expected earnings growth” - a way to check whether a high P/E is at least partly justified by strong growth expectations.

Simple example:

A P/E of 30 with expected earnings growth of 30% gives a PEG of 1. A PEG far above 1 may suggest you are paying a lot for the growth story.

Note that all of these ratios rely on forecasts, which can be wrong. So it’s a rough guide - not a precise tool.

How Professionals Actually Use Valuations

Pros rarely look at one number and stop there. They usually:

• Compare a stock’s valuation to similar companies in the same industry.
• Compare it to its own history (e.g. above/below its 10-year average P/E).

Example 1: an AI leader trading at a premium

Nvidia’s forward P/E has been around ~29.94. That’s higher than the S&P 500’s forward P/E around ~22.4.

Investors are paying extra today because they expect more growth tomorrow.

Example 2: a value-style region trading at a discount

The MSCI Europe Value Index shows a P/E around ~13.46 and a forward P/E around ~11.65 (Nov 28, 2025).

“Cheap” or “expensive” often depends on where you look (and what style you’re buying), not just the company name.

Important Caveat: Valuations Are Not Timing Tools

A valuation ratio can tell you “the bar is high,” but it can’t tell you when the story changes. A stock or an index can stay “expensive” for years if earnings keep growing and investors remain optimistic.

Likewise, something can look “cheap” and stay cheap for a long time if the business is weak or sentiment is poor.

Valuations are best used to avoid obvious extremes and to sense-check expectations - not to guess the exact top or bottom.

The 3-Question Checklist

1. What am I paying for each euro of earnings or sales, and how does that compare to similar companies and to its own history?
2. Is the growth story realistic enough to justify this price, or am I mostly paying for hype?
3. If this stock stopped being trendy tomorrow, would I still feel okay owning it at this valuation?

Valuation is basically your “expectations check.”

It helps you spot when a stock is priced like everything will go perfectly - and when it’s priced like nothing good can happen. But you don’t need to be perfect at valuation. Even a basic grip on these ratios helps you build the habit of thinking like an investor.

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