Equity analysis is not cool but it does have a fashion cycle. At the top of a bull market, the favoured measures for valuing companies get silly – the “price-to-click” ratios of the dotcom boom being a notorious example. At the bottom, investors, burned by false promises of growth and companies’ manipulation of accounts, resort to crude but hard-to-fake measures such as short-term, free-cash-flow yields.

What does recent fashion signal about the cycle? The credit bubble had a corrupting influence. As always, the associated valuation techniques obfuscated the relationship between companies’ valuations and their current profits. Leveraged buy-out candidates were examined using internal rates of return, a measure that was in the analytical dog house largely due to its inability to capture the idea that higher gearing means higher risk. Buoyant debt markets and property prices also encouraged the re-emergence of the idea that unprofitable companies’ value was “backed” by their property portfolios, even if there was minimal chance of ever selling those operating assets to another commercial user.