5 Indicators to Identify Value Stocks

Introduction

Quick takeaway: use five measurable signals to find stocks likely trading below intrinsic value - low price-to-earnings vs peers, low price-to-book, high free-cash-flow yield, low EV/EBIT (enterprise value to operating profit), and a persistent earnings-yield gap to risk-free rates; one weak signal isn't enough. Start with sector-adjusted screens so you compare apples to apples, then do deeper quality checks - balance-sheet strength, cash-conversion, management track record, and one-offs - before you size a position. One rule: combine signals. For a practical screen, flag names in the cheapest 20% by sector-adjusted P/E and P/B, then defintely require FCF yield above sector median and net debt/EBITDA below 3x. Finance: run screens by Friday.

Key Takeaways

• Combine five signals - low sector-adjusted P/E, low sector-adjusted P/B, high FCF yield, low EV/EBITDA, and sustainable dividend/shareholder returns -; one weak signal isn't enough.
• Start with sector-adjusted screens (compare apples-to-apples) and flag names in the cheapest 20% by sector-adjusted P/E and P/B.
• Apply hard filters: require FCF yield above sector median (FCF yield >5% attractive, >10% strong) and net debt/EBITDA <3x; target EV/EBITDA <8x and P/E <15 / P/B <1.5 as rules of thumb.
• Do deeper quality checks before sizing: balance-sheet strength, multi-year cash-conversion, capex sustainability, management track record, cyclicality, and one-off items.
• Action: run a 50-name sector-adjusted screen and flag 10 names for deep due diligence by Friday.

Low price-to-earnings (P/E) relative to peers

Core takeaway and rule of thumb

You're hunting for stocks trading below intrinsic value; a low P/E can flag those opportunities when earnings are stable and reliable.

Use P/E (price divided by trailing or forward earnings) as an initial screen: look for names with P/E below the sector median and below 15. That doesn't make a buy call - it makes an item for deeper work.

One clean line: low P/E points you to potential discounts, not guarantees.

Steps to apply this rule of thumb:

• Pull trailing 12-month and forward P/E for the company and sector.
• Compare to sector median and note absolute P/E versus 15.
• Flag names where both trailing and forward P/E are below the sector median.

Adjust for cyclicality and watch red flags

Different industries have different normal P/Es - manufacturing and materials are cyclical; software and consumer staples are less so. So compare within sector or to a cyclically-adjusted baseline.

Adjustments to make:

• Normalize earnings over a cycle (e.g., 3-5 years) for cyclical firms.
• Use forward P/E only if guidance and analyst consensus look credible.
• Segment comparisons by sub-industry (heavy manufacturing vs light industrial).

Red flags that flip a low P/E from attractive to hazardous:

• Falling revenue and shrinking margins - may signal structural decline.
• One-off accounting gains boosting EPS artificially.
• High non-recurring tax benefits or pension gains inflating earnings.

One clean line: low P/E + falling revenue usually means value is evaporating, not a bargain.

Practical quick check, math, and next steps

Do a quick sanity math and a short checklist before committing time to full due diligence.

Quick check example and math:

• Company P/E = 12, sector median P/E = 20 → company appears to trade at a discount versus peers.
• Compute implied discount: (20 - 12) / 20 = 40% discount to sector multiple.
• If market cap = $600m and EPS = $50m (EPS = earnings/share × shares), then P/E = 12 checks out (600 / 50 = 12).

Practical checklist before moving to deep DD:

• Confirm earnings quality: cash from operations vs reported net income.
• Scan recent quarters for revenue trend and margin direction.
• Check analyst revisions and management guidance for consistency.
• Look for one-off items inflating or deflating EPS.
• Run a sector-adjusted P/E screen on 50 names to flag 10 for deeper review.

What this quick check hides: forward risks from cyclicality, margin erosion, or accounting tricks - so dig into cash flow and revenue drivers before you buy; and yes, do the screen this week.

Action: you run the 50-name sector-adjusted P/E screen and flag 10 names for deep due diligence by Friday. Research: you.

Low price-to-book (P/B) and tangible book value

Takeaway and when P/B matters

You want to find companies where the market price is below the value of their net tangible assets; that's where P/B and tangible book value (TBV) help most. Banks, insurance firms, utilities, and industrials-businesses with heavy physical assets and conservative accounting-are good places to use P/B.

One-liner: P/B flags asset-backed discounts; use it in asset-heavy sectors only.

Practical steps: pull the company's fiscal year‑end 2025 balance sheet, calculate book value (total equity) then subtract intangible assets and goodwill to get tangible book value. Divide market capitalization by TBV for the P/TBV ratio, or use price per share / TBV per share for individual stock screens.

Data sources: use the 2025 10‑K (or audited financials) and reconcile to shares outstanding at the 2025 fiscal year end; don't rely on stale interim numbers.

Rule of thumb and sector adjustments

A simple rule: a stock with P/B below the sector median and P/B under 1.5 or a market price below tangible book suggests a margin of safety. Still, adjust for business mix-brands, software, and services carry a lot of intangible value that TBV ignores.

One-liner: P/B 1.5 is a flag, not a buy signal; adjust by business type.

Actionable checklist before you act:

• Compare company P/B to the 2025 sector median;
• Estimate intangible replacement value for brands or software;
• Normalize book value for one-off impairments in 2025;
• Capitalize recurring R&D if the business earns persistent returns on that spend.

Best practice: for intangible-heavy firms, compute an adjusted TBV where you add back capitalized R&D or subtract excess goodwill; for banks, focus strictly on regulatory tangible common equity metrics used in 2025 reporting.

Red flags and quick check

Red flags that invalidate a low P/B include persistent asset impairments, large deferred tax assets that may not be realized, rising nonperforming loans (for finance), or accounting choices that overstate book value. Look in the 2025 notes for frequent write‑downs, auditor remarks, or related-party asset transfers.

One-liner: a low P/B plus weak balance-sheet signals usually means trouble, not value.

Here's the quick math example you can copy into a model: market cap $900m divided by tangible book value $1.2bn → P/TBV = 0.75. That shows the market values the company at 25% below tangible assets.

What this estimate hides: TBV can include obsolete inventory or property recorded at historical cost; check replacement cost, inspect inventory turnover and capex needs, and read impairment histories for 2023-2025. If management repeatedly delays capex, the TBV may be overstated.

Practical next step: run a sector-adjusted screen using fiscal‑2025 TBV and market cap, flag names with P/TBV < 1.0, then perform focused quality checks (audit notes, impairment history, and asset turn metrics). Equity: run the screen and deliver the 10‑name shortlist by Friday-owner: you.

High free cash flow (FCF) yield and conversion

You're screening for value stocks and want cash-based signals, not just earnings that can be massaged. The direct takeaway: focus on companies with FCF yield above 5%, and treat > 10% as a strong value signal - but only when cash is repeatable.

One clear rule: cash beats accounting.

Interpreting FCF yield versus price

Start by defining FCF the same way every time: operating cash flow minus capital expenditures for fiscal year 2025 (or trailing twelve months if you prefer). Then divide by market capitalization to get FCF yield; some screens use enterprise value, but market-cap FCF yield is simpler for equity value signals.

Rule of thumb thresholds: look for FCF yield > 5% as attractive and > 10% as strongly attractive. If a stock shows 10% on FY2025 numbers, it's worth a deeper look - but not an automatic buy.

• Pull FY2025 cash flow statement.
• Compute FCF = net cash from ops - capex.
• FCF yield = FCF / market cap (use end-FY or current market cap; be consistent).

Quick math shows why this matters: FCF $60m divided by market cap $600m = 10% FCF yield. What this estimate hides: timing of cash, one-offs, and share-count changes.

Keep the language simple and consistent so screens are comparable - otherwise you're comparing apples to oranges.

Check multi-year FCF conversion and capex sustainability

FCF yield is noisy if a single year drove the cash. Always check multi-year conversion: FCF conversion = FCF / net income (or operating profit) over 3-5 years. A steady conversion rate means earnings translate to cash. If conversion collapses, the yield is unreliable.

• Compute 3-year average FCF and 3-year average net income; then get conversion ratio.
• Flag names with conversion < 30% for further review.
• Compare capex to depreciation and sales: capex spikes can be growth investments or maintenance needs.

Watch capex sustainability: if capex is consistently > depreciation and sales growth isn't covering the expense, future FCF may fall. Also adjust FCF for proceeds from asset sales - treat them as non-recurring.

If working capital swings drive FCF, treat the number as provisional; reconcile to cash from operations after stripping volatile receivables or inventory moves. Small typo: this step is defintely worth the time.

Practical checks and quick math you can run now

Run these practical steps on FY2025 statements to separate noise from durable cash:

• Calculate FY2025 FCF and FCF yield (FCF $60m / market cap $600m = 10%).
• Average FCF across FY2023-FY2025 and divide by current market cap for a normalized yield.
• Remove one-offs: subtract asset-sale proceeds, litigation receipts, or tax refunds from FCF before using it in yield.
• Compare capex/sales and capex/depreciation ratios to peers in the same sector.

Flag candidates where FCF yield > 5% and 3-year conversion is steady; mark those > 10% for expedited due diligence.

Next step: You - add a filter FCF yield > 5% to your sector-adjusted 50-name screen and flag names > 10% for deep due diligence by Friday.

Low enterprise value to EBITDA (EV/EBITDA) and manageable leverage

You're comparing companies with different debt levels and need a single, comparable valuation signal - EV/EBITDA plus a leverage check does that. Quick takeaway: a company with EV/EBITDA below the sector median and net debt/EBITDA under 3x is worth a deeper look; below 8x is a practical screening threshold.

Takeaway and why EV/EBITDA matters

EV/EBITDA compares enterprise value (what it would cost to buy the whole company, including debt) to operating profit before non-cash items, so it works across capital structures. Use EV (market cap + net debt) so a highly-levered company isn't deceptively cheap versus an all-equity peer.

One-liner: EV gives you price including debt; EBITDA gives operating earning power - compare the two.

Practical points:

• Calculate EV using FY2025 market cap plus FY2025 net debt (short- and long-term debt minus cash).
• Use FY2025 EBITDA as reported, then adjust for recurring one-offs (restructuring, litigation) so you're comparing apples to apples.
• Prefer EV/EBITDA for cross-sector screens where depreciation and capital structures differ (industrials vs utilities vs software).

Rules of thumb and pairing with leverage

Rule of thumb: filter for EV/EBITDA below the sector median and under 8x. Then require net debt/EBITDA under 3x to avoid balance-sheet risk. That pairing separates cheap-but-stressed from cheap-and-stable.

One-liner: Low multiple plus manageable leverage beats low multiple alone.

Concrete steps to implement a screen using FY2025 data:

• Pull FY2025 market cap, total debt, and cash to compute FY2025 net debt.
• Take FY2025 reported EBITDA, remove one-offs, and, if cyclicality exists, compute a three-year normalized EBITDA including 2023-2025.
• Compute EV = market cap + net debt; then EV/EBITDA and net debt/EBITDA.
• Flag names where EV/EBITDA < sector median and 8x, and net debt/EBITDA 3x.
• Score names by margin stability, capex needs, and interest coverage to prioritize

Risks, red flags, quick check, and practical verification

Red flags: a low EV/EBITDA can hide rising capex, collapsing margins, or EBITDA declines - all of which can turn apparent value into distress. Also watch off-balance sheet leases, pension deficits, and large minority interests that distort EV.

One-liner: Low multiple is a signal, not a buy order - verify cash, capex, and margin trends.

Here's the quick math using FY2025 numbers: FY2025 EV $1.2bn divided by FY2025 EBITDA $200m = EV/EBITDA of 6x. That clears the 8x filter and looks attractive at face value.

What this estimate hides:

• Check FY2025 capex vs EBITDA - if capex consumes most EBITDA, free cash falls fast.
• Confirm EBITDA converts to cash: look at FY2025 operating cash flow and FCF; big working-cap swings can inflate EBITDA without generating cash.
• Recompute including operating lease liabilities and preferred claims to ensure EV is complete.
• Verify interest coverage (EBITDA / interest expense) and covenant headroom using FY2025 numbers - thin coverage raises refinancing risk even with low EV/EBITDA.

Practical verification checklist (do these for each flagged FY2025 name):

• Compare FY2025 EV/EBITDA to the sector median and top decile.
• Confirm net debt/EBITDA 3x and interest coverage > industry norms.
• Check capex run-rate, pension deficits, and lease capitalization adjustments.
• Stress-test EBITDA down 20-30% and recompute leverage and covenant triggers.

Action: run a 50-name sector-adjusted EV/EBITDA + net-debt/EBITDA screen using FY2025 figures and flag 10 names for deep due diligence by Friday. Research: you own the screen and deliver the flagged list.

High and sustainable dividend yield / shareholder returns

You're evaluating value stocks and want dividend signals that actually mean something; the quick takeaway is this: reliable dividends or buybacks show management confidence and return capital, but only when backed by earnings or free cash flow. Look for a yield above 3% plus a consistent history of coverage before you call a stock a value pick.

Takeaway and rule of thumb

Dividends and buybacks are useful signals because they convert earnings into cash returns you can measure. A dividend yield higher than 3% is noteworthy; sustained coverage by earnings (EPS) or free cash flow (FCF) turns that number into a durable advantage. One clean line: yield plus coverage beats headline yield alone.

Practical steps:

• Compare yield to sector median
• Check 3‑year dividend consistency
• Prefer buybacks when shares outstanding fall
• Flag yields > 3% with no coverage

Verify payout ratio and cash coverage

Don't trust the yield without checking how it's paid. Calculate the dividend payout ratio = dividends / net income and target under 70% for safety. Also compute dividend coverage from FCF = dividends / free cash flow; if coverage exceeds 1.0 the company is paying out more cash than it generates - a red flag.

What to inspect, step by step:

• Pull last fiscal year EPS and dividends
• Compute payout ratio; prefer <70%
• Compute dividends / FCF for the same period
• Check 3-year averages for both metrics
• Review debt trends and interest burden

Red flags to watch: rising payout ratio with falling EPS, dividends funded by debt, or one-off asset sales boosting cash - defintely dig deeper if you see those.

Quick check, validation steps, and next action

Quick math example: dividend $1.20 per share on a $40 stock = a 3% yield - that's the starting point, not the finish line. Confirm coverage by dividing total dividends by reported FCF; if FCF covers dividends comfortably (e.g., coverage <1.0), the yield is meaningful.

Validation checklist:

• Run dividend yield vs sector median
• Verify payout ratio < 70%
• Confirm dividends / FCF < 1.0 on trailing twelve months
• Scan cash flow statement for one-offs
• Check if buybacks reduce share count

Action: You run a 50-name, sector-adjusted dividend screen, then flag 10 names for deep due diligence by Friday (Owner: you).

Five indicators: screen, then deep-dive

You want to find stocks trading below intrinsic value and avoid value traps; run combined, sector-adjusted screens and then do quality checks. Quick takeaway: screen for low P/E, low P/B, high FCF yield, low EV/EBITDA with manageable leverage, and reliable shareholder returns together - one weak signal isn't enough.

Actionable screening checklist

One-liner: build a single screen that applies all five signals at once.

Start with these hard filters (apply to fiscal year 2025 data):

• P/E < sector median and P/E < 15
• P/B < 1.5 or price < tangible book
• FCF yield (FCF / market cap) > 5%; flag > 10%
• EV/EBITDA < sector median and EV/EBITDA < 8x
• Net debt / EBITDA < 3x
• Dividend yield > 3% and payout ratio < 70% or consistent buybacks

Apply market-cap and liquidity floors (eg, market cap > $200m and average daily volume > $1m) so you defintely don't chase micro illiquids. Use trailing twelve-month (TTM) and fiscal-year-2025 metrics, and require at least two years of history for FCF and payout ratios to avoid single-period noise.

Execution steps for the 50-name sector-adjusted screen

One-liner: screen by sector first, then rank within each sector to get 50 names that are cheap for the right reasons.

Step-by-step:

• Pull fiscal-2025 P/E, P/B, EV, EBITDA, FCF, net debt, dividend and shares outstanding per company
• Compute sector medians using GICS or comparable classification
• Normalise: score each name vs sector median (z-score or percentile) on the five metrics
• Rank by composite cheapness score; cap to 50 names and ensure no sector > 25% weight
• Quick sanity checks: revenue change last 2 years, FCF conversion (FCF / EBITDA), and recent capex trends

Quick math example: EV = market cap + net debt; EV/EBITDA = EV / EBITDA. If EV = $1.2bn and EBITDA = $200m, EV/EBITDA = 6x. If FCF = $60m and market cap = $600m, FCF yield = 10%. What this estimate hides: one-off asset sales or working-cap swings can make FCF look artificially high - always check cash flow from operations line.

Prioritization, quality checks, and ownership

One-liner: after the screen, run a short checklist to prioritize 10 names for deep due diligence.

Prioritise names that clear multiple checks: low relative P/E and EV/EBITDA, P/TBV < 1, FCF yield > 5% sustained for 2+ years, and dividend or buyback history. Use this quick DQ (due-quality) checklist:

• Revenue trend: stable or growing last 3 FYs; red flag if -10%+ annually
• Earnings quality: non-GAAP adjustments < 10% of EBITDA
• Capital needs: capex / sales steady and not rising rapidly
• Balance sheet: liquidity ratio and covenant headroom, net debt/EBITDA < 3x
• Insider ownership and recent insider purchases

Assign owners and deadlines: You run the sector-adjusted 50-name screen today and flag the top 10 names for deep due diligence by Friday, 5 December 2025. Research: verify FY2025 numbers from 10-Ks/annual reports and the latest quarterly filing before starting deep work. Finance: prepare a 13-week cash view if any candidate has leverage near covenant levels.