Week 3 review: every sector is valued differently

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Key idea: REITs, banks, software firms and miners each need their own yardstick. Using the wrong one gives confident nonsense.

This week covered quality and risk: returns on capital, margins, debt, dividends, priced-in growth and red flags. The last piece is that the right yardstick depends on the industry.

Real estate trusts (REITs) are judged on funds from operations (FFO), because normal accounting depreciation understates what property is worth. Banks and insurers use book value and ROE (Day 13). Young software firms are often unprofitable on purpose, so revenue multiples and margins on the path to profit matter. Miners and oil producers depend on commodity prices, so a mid-cycle view matters more than this year's profit (Day 4).

A P/E of 40 can be normal for one industry and alarming in another. When you compare companies, compare within an industry.

Equity Rank sorts companies into types and changes its methods and weights for each, which you can see on every stock page.

Quick check

Which measure is most commonly used to value a real estate trust (REIT)?

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