In this unit, we'll master market multiples - one of the most widely used valuation methods by professionals worldwide.

Market multiples help us value companies by comparing them to similar businesses. Think of it like comparing house prices per square foot in a neighborhood. We'll cover four essential multiples that every analyst uses.

Engagement Message

Can you think of another everyday product where you compare price per unit?

The most famous market multiple is the P/E ratio (Price-to-Earnings). You've probably heard of it before.

P/E tells us how much investors are willing to pay for each dollar of a company's annual earnings. It's calculated as: Stock Price ÷ Earnings Per Share.

Engagement Message

Can you remember a headline or company where you saw a P/E ratio mentioned?

Let's walk through a simple example. If ABC Company's stock trades at $50 per share and earned $2 per share last year, the P/E ratio is:

$50 ÷ $2 = 25

This means investors pay $25 for every $1 of earnings.

Engagement Message

In one phrase, what does a P/E ratio tell you?

What does a P/E of 25 actually mean? It suggests investors expect strong future growth - they're willing to pay a premium today for higher earnings tomorrow.

Generally, high P/E ratios indicate growth expectations, while low P/E ratios suggest slower growth or value opportunities.

Engagement Message

Which would you expect to have a higher P/E: a tech startup or a utility company?

The second key multiple is EV/EBITDA (Enterprise Value to Earnings Before Interest, Taxes, Depreciation, and Amortization).

This compares a company's total value to its operating cash flow. It's especially useful when comparing companies with different debt levels or tax situations.

Engagement Message

Why might EV/EBITDA be better than P/E for comparing a debt-heavy company to a debt-free one?

The third multiple is P/B (Price-to-Book) ratio. This compares stock price to book value per share - essentially what investors pay for each dollar of company assets.

P/B works best for asset-heavy businesses like banks, insurance companies, or real estate firms.

Engagement Message

Which type of company would you expect to have a P/B ratio closer to 1: a bank or a software company?

The fourth multiple is EV/Sales (Enterprise Value to Sales). This compares a company's total value to its annual revenue.

EV/Sales is particularly valuable for unprofitable companies or startups that don't yet have consistent earnings to analyze.

Engagement Message

Why would EV/Sales be more useful than P/E for valuing a loss-making growth company?

Each multiple works best in specific situations. P/E for profitable companies, EV/EBITDA for comparing different capital structures, P/B for asset-heavy businesses, and EV/Sales for unprofitable companies.

Smart analysts combine multiple ratios for a complete valuation picture.

Engagement Message

If you were valuing a profitable tech company, which two multiples would you prioritize?

Type

Multiple Choice

Practice Question

Company XYZ trades at $30 per share and earned $3 per share last year. What's its P/E ratio?

A. 9
B. 10
C. 12
D. 15

Suggested Answers

• A
• B - Correct
• C
• D