Price Multiples: Types, Formulas, and Examples

What Are Price Multiples?

Price multiples are financial ratios that compare a company’s stock price to a measure of its financial performance, such as price-to-earnings (P/E) or price-to-cash flow (P/CF). Price multiples provide investors and analysts with a simple, market-based benchmark of valuation.

Price multiples are commonly used in relative valuation, where a company’s financial worth is compared against peers, industry averages, or historical norms. 

How Do Price Multiples Work?

Price multiples work by dividing a company’s stock price by a financial metric expressed on a per-share basis. The result shows how the market values each unit of the company’s financial performance.

Price multiples are typically expressed as the share price divided by a per-share metric: Price Multiple = Share Price ÷ Per-Share Metric. 

• The numerator is the share price of a company’s stock at a given time. You can easily locate a stock’s share price by checking any stock price chart.
• The denominator is the per-share metric for a specific price multiple, such as earnings per share, book value per share, or cash flow per share. You can find the data to calculate these metrics in a company’s financial statements.

Price Multiple Example: Price-to-Earnings (P/E)

The P/E ratio compares a company’s share price to its earnings per share (EPS) using the formula: P/E = Stock Price Per Share / Earnings Per Share.

If a company’s stock currently trades at $40 and EPS is $4, the P/E ratio is 10x ($40 share price / $4 EPS). Investors are effectively paying $10 for every $1 of current earnings.

Key Considerations When Working With Price Multiples

As you work with price multiples, keep in mind that both the numerator and denominator can be influenced by factors that don’t always reflect a company’s true value.

Stock prices may swing on short-term news, market hype, or fear, which can temporarily distort a multiple. Financial metrics used in the denominator like earnings and sales can be shaped by accounting policies, estimates, or one-time gains and losses, making direct comparisons challenging.

Price multiples are most useful when applied across companies with similar business models, capital structures, and growth prospects. Outliers like restructuring charges or asset write-downs can skew results, so analysts often adjust reported figures to get a more reliable view. When valuing a business, analysts use price multiples along with enterprise value multiples and discounted cash flow (DCF) techniques.

What Are Some Common Price Multiples?

The most common price multiples include price to earnings (P/E), sales (P/S), book value (P/B), and cash flow (P/CF). 

• Price-to-Earnings (P/E): The P/E ratio compares a company’s share price to its earnings per share (EPS). (Note: P/E ratios aren’t meaningful for firms with negative earnings.) 
• Price-to-Sales (P/S): The P/S ratio compares a company’s stock price to revenue per share. 
• Price-to-Book (P/B): The P/B ratio compares the market price of a stock to its book value per share (the shareholders’ equity value reported on the balance sheet).
• Price-to-Cash Flow (P/CF): The P/CF ratio compares a company’s stock price to operating cash flow per share.

Keep in mind that not all price multiples fit every industry or company. 

For example, the P/B ratio, which compares share price to book value per share, works well for asset-heavy businesses like manufacturers, where tangible assets dominate the balance sheet. 

Tech companies, by contrast, create most of their value from intangible assets, such as software, IP, or brand, that don’t appear fully on the balance sheet. The book value per share of tech companies often looks low compared to market value, making P/B less useful. For these firms, multiples based on earnings, revenue, or cash flow are typically more relevant.

How Are Price Multiples Used?

Price multiples are most often used in comparables analysis (comps), where an analyst looks at a group of similar companies and compares their ratios. For instance, if most firms in an industry trade at 15x P/E and a target company trades at 10x, that gap may suggest undervaluation, provided the companies share similar growth, risk, and profitability characteristics.

In practice, analysts rely on price multiples to:

• Compare companies to peers or industry averages to identify potential relative undervaluation or overvaluation.
• Screen for investment opportunities by filtering stocks based on valuation thresholds.
• Track valuation trends over time to see if a company looks expensive or cheap relative to its own history.

What Are the Advantages and Limitations of Price Multiples?

The advantages of price multiples are that they’re simple, widely used, and easy to compare, while the limitations are that they may overlook growth, risk, and differences in accounting practices.

Advantages

• Simple to calculate using readily available financial data.
• Widely used in practice, making them a common benchmark in valuation.
• Relatively easy to compare across peers, industries, or time periods.

Limitations

• Overlook growth potential, which can make fast-growing companies look expensive.
• Ignore risk differences, since companies with higher debt or volatility may deserve lower multiples.
• Affected by accounting methods, which can distort comparisons between firms.

For these reasons, analysts typically use price multiples along with other techniques like DCF when valuing companies.

Price Multiples vs. Enterprise Value Multiples

Price multiples focus on equity investors only and use metrics after interest expense (like net income). Enterprise value (EV) multiples reflect the value of the whole business, independent of capital structure, and usually use operating metrics before interest expense.

Example: Two companies might have the same EV/EBITDA multiple, but if one is heavily indebted, its P/E ratio could be much lower. EV multiples are particularly useful in mergers, acquisitions, and buyouts since enterprise value is the effective total acquisition cost of a company. It includes the cost to buy out the equity investors and refinance or retire the existing debt.

Side-By-Side Comparison: Price Multiples vs. Enterprise Value Multiples

Price Multiples Recap

Price multiples compare a company’s equity value (what shareholders own) to a measure of performance, such as earnings, sales, book value, or cash flow. Investors and analysts use price multiples in comparable valuation analysis and for quick insights into a stock’s value versus its peers or other benchmarks.

While simple to use and interpret, price multiples should always be considered alongside market trends, industry, accounting practices, and other factors that don’t always reflect a company’s true value.

Frequently Asked Questions (FAQs)

What are price multiples in valuation?

Price multiples are ratios that compare a company’s stock price to a financial metric like earnings, sales, book value, or cash flow. They provide a quick, market-based benchmark of valuation and are often used in relative valuation to compare companies.

Why are price multiples important in business valuation?

Price multiples are important because they provide a fast way to compare a company’s valuation against peers, industry benchmarks, or historical averages. They help investors and analysts judge whether a stock appears undervalued or overvalued.

What is the difference between price multiples and enterprise value multiples?

Price multiples measure equity value relative to financial metrics, while enterprise value multiples measure total business value relative to metrics like EBITDA or revenue. EV multiples account for both debt and equity, making them better for comparing companies with different capital structures.

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Additional Resources

Comparable Company Analysis

Relative Valuation Models

Types of Valuation Multiples

See all Valuation resources