As long as you make sure that the firm doesn’t have a large number of bad loans on its books—see Chapter 17 for more on banks and bad loans—P/B can be a solid way to screen for undervalued financial firms. Just remember that financial firms trading below book value (a P/B lower than 1.0) are often experiencing some…

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strategy is roughly twice as important as a firm’s industry when it’s trying to build an economic moat.6

P/S ratio useful for quickly valuing companies with highly variable earnings, by comparing the current P/S ratio with historical P/S ratios.

most highly profitable firms tend to become less profitable over time as competitors chip away at their franchises.

Paying less taxes and buying back shares are good things for shareholders, no question, but they’re short-term fixes rather than long-term sources of earnings growth.

Add the government bond rate to the risk premium, and you have what’s known as a discount rate.

Firms that generate free cash flow essentially have money left over after reinvesting whatever they need

This line item becomes especially important for companies in financial distress because the entire amount often has to be paid back quickly.

Estimating how long a moat will last is tough stuff, but you need to at least give it some thought, even if you can’t come up with a precise answer. Just being able to separate firms into three buckets—a few years, several years, and many years—is very useful.