Savvy Nickel
by Aswath Damodaran
Aswath Damodaran — NYU's 'Dean of Valuation' — distills his comprehensive valuation framework into an accessible guide for investors. Learn to value any company using DCF analysis, relative valuation, and option-based methods with practical, step-by-step guidance.
*Disclosure: This article contains affiliate links. If you purchase through these links, we may earn a commission at no additional cost to you. We only recommend books we genuinely believe in.
Aswath Damodaran is Professor of Finance at NYU Stern School of Business and the world's most prolific author on valuation. His textbooks (Investment Valuation, Damodaran on Valuation) are 800-1000 page graduate-level references. The Little Book of Valuation is his condensed version for the intelligent non-specialist — covering the full valuation toolkit in 256 accessible pages. If you want to learn to value companies without going to business school, this is the best place to start.
| Attribute | Details |
|---|---|
| Title | The Little Book of Valuation |
| Author | Aswath Damodaran |
| Publisher | Wiley |
| Published | 2011 |
| Pages | 256 |
| Reading Level | Intermediate |
| Amazon Rating | 4.5/5 stars |
Hardcover: Buy on Amazon
Kindle: Buy on Amazon
Aswath Damodaran is a professor at NYU Stern School of Business where he has taught valuation for over 30 years. He maintains a publicly accessible website (damodaran.com) that provides free valuation data, templates, and lecture notes for every industry and country. He values companies publicly — Apple, Amazon, Tesla, Uber at various stages — and explains his assumptions transparently. He is universally regarded as the most accessible and intellectually honest practitioner of valuation analysis.
Damodaran opens with a critical philosophical point: valuation is not precise. Any valuation produces a range of outcomes, not a single right answer. Models require assumptions about the future that are inherently uncertain.
The three types of valuation:
| Type | Approach | When Used |
|---|---|---|
| Intrinsic (DCF) | Present value of future cash flows | When you want to know what a company is worth independent of market opinion |
| Relative | Compare to peers using multiples (P/E, EV/EBITDA) | When you want to know if a company is cheap or expensive vs. the market |
| Option-based | Value flexibility using option pricing | For companies with significant optionality (distressed firms, natural resources, pharmaceutical pipelines) |
Most investors should focus on DCF and relative valuation. Option-based valuation requires more technical machinery.
The value of any asset equals the present value of all future cash flows it will generate, discounted at an appropriate rate.
Value = CF₁/(1+r) + CF₂/(1+r)² + CF₃/(1+r)³ + ... + CFₙ/(1+r)ⁿWhere:
Damodaran uses Free Cash Flow to Firm (FCFF) as the primary cash flow measure:
FCFF = EBIT × (1 - tax rate)
+ Depreciation & Amortization
- Capital Expenditures
- Change in Working CapitalThe reinvestment rate:
Not all earnings are available to distribute — companies must reinvest some to grow. The reinvestment rate determines how much of earnings returns to investors vs. funds growth:
Reinvestment Rate = (Capex - Depreciation + Change in Working Capital) / EBIT(1-t)A company that must reinvest 70% of after-tax earnings to grow at 10% has less intrinsic value than one that can grow at 10% while reinvesting only 30%.
The Weighted Average Cost of Capital (WACC) represents the blended required return for debt and equity investors:
WACC = (E/V) × Ke + (D/V) × Kd × (1 - tax rate)Where:
Estimating the cost of equity using CAPM:
Ke = Risk-Free Rate + Beta × Equity Risk Premium| Component | Typical Values (2024) |
|---|---|
| Risk-Free Rate (10-yr Treasury) | 4.5% |
| Equity Risk Premium (U.S.) | 4.5-5.5% |
| Beta (market-average) | 1.0 |
| Beta (low-risk consumer staples) | 0.5-0.7 |
| Beta (high-growth tech) | 1.3-2.0 |
Example — stable consumer brand:
Ke = 4.5% + 0.65 × 5.0% = 7.75%
WACC (with 20% debt at 5% pre-tax, 25% tax) =
0.80 × 7.75% + 0.20 × 5.0% × (1-0.25) = 6.95%Most of a company's value comes from cash flows beyond the explicit forecast period. The terminal value captures this:
Terminal Value = FCFFₙ × (1 + g) / (WACC - g)Where g = perpetual growth rate (typically 2-3%, close to long-run GDP growth)
The terminal value sensitivity problem:
Terminal value typically accounts for 60-80% of total DCF value. A small change in the terminal growth rate or discount rate produces large changes in estimated value:
| Terminal Growth Rate | WACC 7% | WACC 8% | WACC 9% |
|---|---|---|---|
| 2% | 20.0x | 16.7x | 14.3x |
| 3% | 25.0x | 20.0x | 16.7x |
| 4% | 33.3x | 25.0x | 20.0x |
(Multiples of normalized free cash flow)
Damodaran's guidance: Use conservative terminal assumptions (g = 2-3% maximum; no company grows faster than the economy forever). This creates a margin of safety built into the terminal value assumption.
The most widely used valuation multiple. Compares the stock price to earnings per share.
P/E = Price / Earnings per ShareInterpreting P/E:
A high P/E means investors are paying more for each dollar of current earnings, typically because:
The PEG ratio (adjusting for growth):
PEG = P/E / Expected Earnings Growth RateA company trading at 20x earnings with 20% expected growth has a PEG of 1.0. A company trading at 20x earnings with 10% expected growth has a PEG of 2.0 — more expensive on a growth-adjusted basis.
P/E by sector (approximate 2024 ranges):
| Sector | Typical P/E Range | Why |
|---|---|---|
| Utilities | 15-20x | Slow growth; stable regulated earnings |
| Consumer Staples | 20-25x | Stable earnings; moderate growth |
| Healthcare | 20-30x | Moderate growth; high quality |
| Technology (established) | 25-40x | Higher growth; high margins |
| High-growth software | 40-100x+ | Revenue growth prioritized over current profit |
EV/EBITDA is preferred over P/E for many analyses because it:
Enterprise Value = Market Cap + Total Debt - Cash
EV/EBITDA = Enterprise Value / EBITDAEV/EBITDA norms by sector:
| Sector | Typical EV/EBITDA |
|---|---|
| Telecommunications | 5-8x |
| Retail | 6-10x |
| Industrial | 8-12x |
| Healthcare services | 10-15x |
| Software (SaaS) | 15-30x |
| Technology platforms | 25-50x+ |
P/B = Market Price / Book Value per ShareP/B is most useful for financial companies (banks, insurance companies) where balance sheet assets closely approximate replacement value.
P/B benchmarks:
Used for companies with no current earnings — particularly high-growth technology, biotech, and turnaround situations.
P/S = Market Cap / Annual RevenueInterpreting P/S:
| P/S Multiple | Typical Context |
|---|---|
| Below 0.5x | Very cheap; potential distress or declining business |
| 0.5-2x | Mature, lower-margin businesses |
| 2-5x | Moderate-growth with decent margins |
| 5-15x | High-growth with path to strong margins |
| Above 15x | Hyper-growth; priced for dominant market position |
Damodaran dedicates chapters to the unique challenges of valuing different types of companies:
The challenge: most value is in the terminal value, which depends on assumptions about a future that is inherently uncertain.
Damodaran's approach:
Key sensitivities for growth companies:
| Assumption | Low Case | Base Case | High Case |
|---|---|---|---|
| Year 10 revenue | $5B | $15B | $50B |
| Year 10 operating margin | 10% | 20% | 30% |
| Discount rate | 12% | 10% | 8% |
| Resulting value | $20/share | $85/share | $350/share |
The enormous range illustrates why growth stock valuation is more art than science — and why margin of safety is essential.
Mature companies are easier to value but require attention to:
For companies with negative earnings or declining revenues, standard multiples do not work. Damodaran's approach:
Damodaran explicitly addresses the need for a margin of safety:
Every DCF contains estimation error. The discount rate might be wrong by 1%. The terminal growth rate might be wrong by 0.5%. The near-term cash flows might be wrong by 20%.
The margin of safety principle applied:
If your DCF suggests intrinsic value of $100/share, do not pay $100. Pay $70-80 (a 20-30% discount) to account for model error.
The required margin of safety should be larger for:
And smaller for:
Damodaran makes all his valuation templates available free on damodaran.com:
| Tool | Description |
|---|---|
| DCF model templates | Excel models for different company types |
| Data sets | Historical industry data for discount rates, growth rates, margins |
| Company-specific valuations | Damodaran's own valuations with full assumptions disclosed |
| Risk premium data | Historical and implied equity risk premiums by country |
These free resources make the book uniquely actionable — you can immediately implement the frameworks using professionally designed tools.
Q: Do I need to know accounting to use this book?
A: Yes, basic accounting knowledge is assumed. Understanding income statements and cash flow statements is necessary. Read Financial Statements by Ittelson first if you need the foundation.
Q: Is this enough to value companies or do I need Damodaran's longer books?
A: Sufficient for most investment decisions. His longer books (Investment Valuation) add nuance for complex situations — M&A, cross-border valuation, option pricing — but 80% of investors will never need that depth.
Rating: 4.6/5
The Little Book of Valuation is the best single-volume valuation guide for investors. Its DCF framework, relative valuation multiples, and company-type-specific guidance provide a complete toolkit. Combined with the free resources at damodaran.com, it is the most actionable valuation education available outside of formal business school training.
Hardcover: Buy on Amazon
Kindle: Buy on Amazon
Prices current as of publication date. Free shipping available with Prime.
by Howard Schilit & Jeremy Perler
Howard Schilit's essential guide to detecting accounting manipulation and financial fraud. Learn the seven earnings manipulation schemes and six cash flow shenanigans that companies use to deceive investors — with real-world examples from Enron to Groupon.
by Thomas R. Ittelson
Thomas Ittelson's visual, jargon-free guide to reading and understanding financial statements. The single best book for investors and business owners who want to understand balance sheets, income statements, and cash flow statements without an accounting background.
by Benjamin Graham & David Dodd
The foundational textbook of fundamental analysis, first published in 1934. Graham and Dodd created the discipline of security analysis from scratch, establishing the framework that professional analysts still use today.
Most people accept the first offer they get. That single decision can cost them hundreds of thousands of dollars over a career. Here's how to negotiate — and why the stakes are higher than they appear.
The ability to wait - to choose a larger reward later over a smaller one now - is the single most consistent predictor of financial outcomes. Here's the science, and how to actually build this skill.
Fractional shares let you buy a slice of any stock or ETF regardless of its price. Here is how they work, which brokerages offer them, and when they actually matter for your portfolio.