FI Pillar: Earnings & Valuation
Profit strength and market pricing form the foundation of corporate performance and investor expectations. This pillar measures how effectively companies convert growth into profits, how markets value those profits, and how future expectations evolve.
Why Earnings & Valuation Matter
This pillar captures the essence of equity investing — earnings drive value creation, and valuations reflect how much investors are willing to pay for that growth. Monitoring profitability, revisions, and valuation multiples helps investors balance opportunity with risk and identify where markets may be over- or under‑pricing future returns.
Key Metrics and Their Importance
1. EPS Growth & Quality
Why it’s important: Sustainable earnings growth underpins long-term equity performance. High-quality earnings — supported by strong cash flow and balance sheet health — indicate durable business models.
Factors involved: Revenue trends, margins, operating leverage, cash conversion (OCF/NI), accruals quality, and capital allocation. Analysts assess YoY EPS growth and TTM trends for durability.
2. Estimate Revisions
Why it’s important: Changes in analyst expectations are a powerful leading indicator of stock performance. Upward revisions typically precede relative outperformance, while broad downgrades can flag rising market risk.
Factors involved: Net upgrades/downgrades over 1–3 months, guidance changes, revision breadth across sectors, and dispersion of estimates. Watch inflection points around earnings seasons.
3. Valuation Multiples (P/E, EV/EBIT, PEG)
Why it’s important: Valuation determines the price paid for each unit of earnings and embeds expectations for growth and risk. Extreme valuations imply asymmetric outcomes.
Factors involved: Forward vs. trailing P/E, EV/EBIT/EBITDA for capital‑structure neutrality, PEG for growth‑adjusted context, and relative valuation vs. history, sector peers, and interest‑rate regime.