Why I never judge a bank like any other stock

2026-07-08 · By Lubin Danilo, founder of Lubin Investment

For most companies, I compare the share price to the cash it generates (P/FCF). But a bank's balance sheet has nothing in common with a factory's or a software company's: loans and deposits distort that calculation. Here's why I look at banks differently, with Goldman Sachs as a concrete example.

Key takeaways

Free cash flow, as I usually calculate it, doesn't translate well to banks: their balance sheet is made of loans and deposits, not factories or inventory.
Goldman Sachs shows a P/FCF of 5.7x, a very low number, but my cash return on invested capital metric isn't even calculable for it.
For a bank, I focus on comparison with sector peers first, not the ratio's absolute value.
Dividends, payout ratio, and profitability (net margin, growth) stay reliable signals regardless of the company.

Why a bank's balance sheet breaks my usual math

For a regular company, free cash flow is calculated simply: cash generated by operations, minus the investment needed to keep running (capex). A bank has no factory or inventory in the classic sense. Its balance sheet is made of loans it grants (that's its business) and deposits it takes in (partly its funding). Both amounts swing enormously from year to year, for reasons often unrelated to the bank's real profitability: a strong quarter of deposit inflows can blow up a cash flow figure without the underlying business changing at all.

The result: a bank's P/FCF can look extremely low, or extremely high, without truly reflecting its quality or real price.

The concrete example of Goldman Sachs

Goldman Sachs trades at 5.7 times its free cash flow, a number that for almost any other company would scream extreme bargain. But if I look at my cash return on invested capital metric, meant to measure how much cash the bank generates for every dollar reinvested, it's simply not calculable for Goldman with my usual formula: adjusted free cash flow comes out negative or nil over the period, an artifact of the banking model rather than a real warning sign.

What I look at instead

For a bank, I keep the P/FCF, but only in relative comparison with sector peers: Goldman at 5.7 times versus a 16.4 times median for investment banking remains a useful signal, even if the absolute number is fragile. I then rely on metrics that stay reliable regardless of the company: net margin (is the bank simply profitable?), revenue growth, the dividend and its payout ratio, and share count (buying back or diluting?).

What this changes for you

If you're looking at a bank, an insurer, or any other financial company on my site and see a P/FCF that looks incredibly low, don't rush to conclusions. Look at it against sector peers, never in isolated absolute terms, and cross-check it with profitability and dividends. That's exactly why I maintain sector comparisons on every page: context changes everything.

FAQ

Why is P/FCF less reliable for a bank?

A bank's balance sheet is made of loans and deposits that swing heavily year to year for reasons unrelated to its real profitability, which distorts the free cash flow calculation.

Is Goldman Sachs really undervalued with a 5.7x P/FCF?

It's a positive signal in relative comparison with its investment banking peers (16.4x median), but the ratio's absolute value is less reliable for a bank than for a regular company.

What do you look at instead of P/FCF for a bank?

Comparison with sector peers, net margin, revenue growth, the dividend and its payout ratio, and the trend in shares outstanding.

Does this limitation apply to all financial companies?

Yes, to varying degrees: insurers, banks, and other companies whose balance sheet is dominated by financial assets and liabilities require the same caution regarding absolute P/FCF.

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About the author

Written by Lubin Danilo, founder of Lubin Investment. A self-taught individual investor, I find fundamental analysis fascinating, and it has delivered excellent results. For three years now, my performance has beaten the S&P 500. But analyzing every stock took too much time: sites with incomplete data, calculation methods and criteria never aligned with mine. And spotting the best stocks was just as time-consuming, even with my own well-defined checklist. So I put my software development background to work to build this software, base my investment strategy on its results, and share it with people who share the same passion as me. It judges a company's quality and its price separately, using criteria drawn from the financial literature (Warren Buffett, Michael Mauboussin, Aswath Damodaran).