What is a 'Multiple'

A multiple measures some aspect of a company's financial well-being, determined by dividing one metric by another metric. The metric in the numerator is typically larger than the one in the denominator.

For example, a multiple can be used to show how much investors are willing to pay per dollar of earnings, as computed by the price-to-earnings (P/E) ratio. Assume you are analyzing a stock with $2 of earnings per share (EPS), which is trading at $20. This stock has a P/E of 10. This means investors are willing to pay a multiple of 10 times the current EPS for the stock.

This is calculated as:

Formula for calculating a multiple

BREAKING DOWN 'Multiple'

In the world of stock valuation, two major methods are based on cash flow and a multiple of some performance measure, such as the earnings or sales. Valuation based on cash flow (i.e. the discounted cash flow analysis) is considered to be an intrinsic valuation, while valuation based on a multiple is considered to be relative, because the multiple is relative to some performance measure.

Commonly Used Multiples

The most common multiple used in the valuation of stocks is the P/E multiple. It is used to compare a company's market value (price) with its earnings. A company with a price or market value that is high compared to its level of earnings has a high P/E multiple. A company with a low price compared to its level of earnings has a low P/E multiple. A P/E of 5x means a company’s stock is trading at a multiple of five times its earnings. A P/E of 10x means a company is trading at a multiple that is equal to 10 times earnings. A company with a high P/E is considered to be overvalued. Likewise, a company with a low P/E is considered to be undervalued.

Other commonly used multiples include the enterprise value (EV) to earnings before interest, taxes, depreciation and amortization (EBITDA) multiple, also referred to EV/EBITDA. It is widely considered to be a solid measure cash flow available to a firm and used by many equity analysts. EV to earnings before interest and taxes (EBIT), also referred to as EV/EBIT, is used for less capital-intensive companies, with fewer depreciation and amortization expenses. The EV to sales ratio, also referred to as EV/Sales, is a multiple that companies with negative earnings often use. All multiples act as a single number that analysts can multiply by some financial metric to determine the relative value.

RELATED TERMS
  1. Multiples Approach

    The multiples approach is a valuation theory based on the idea ...
  2. Relative Valuation Model

    A relative valuation model is a business valuation method that ...
  3. Enterprise Multiple

    Enterprise multiple is a measure (the company's enterprise value ...
  4. Forward Price To Earnings - Forward ...

    Forward price to earnings (forward P/E) is a measure of the price-to-earnings ...
  5. P/E 30 Ratio

    P/E 30 ratio means that a company's stock price is trading at ...
  6. Trailing Price-To-Earnings - Trailing ...

    Trailing price-to-earnings (P/E) is is calculated by taking the ...
Related Articles
  1. Investing

    What the Enterprise Multiple Tells Value Investors

    Learn how the enterprise multiple which looks at company debt and cash levels, in addition to its stock price, can be taken advantage of in value investing.
  2. Investing

    How To Use The P/E Ratio And PEG To Tell A Stock's Future

    The P/E ratio is used to calculate stock price valuation. However the PEG ratio includes earnings growth and can provide insight as to whether the P/E valuation is justified.
  3. Investing

    Beware False Signals From the P/E Ratio

    The P/E ratio is a simple tool for evaluating a company, but it can also send false signals.
  4. Investing

    What Lies Ahead for Apple's P/E ratio

    Recently, Apple's P/E multiple has come down to levels equal to the S&P 500. What does the future hold for the tech giant's P/E ratio?
  5. Investing

    Can Investors Trust The P/E Ratio?

    The P/E ratio is one of the most popular stock market ratios, but it has some serious flaws that investors should know about.
  6. Investing

    Is Stock With a Lower P/E Always A Better Choice?

    Is a stock with a lower P/E always a better investment than a stock with a higher one? The short answer is no, but it depends on a few things.
  7. Investing

    Understanding The P/E Ratio

    Learn what the price/earnings ratio really means and how you should use it to value companies.
  8. Investing

    Are stocks with low P/E ratios always better?

    Is a stock with a lower P/E ratio always a better investment than a stock with a higher one? The short answer is no. The long answer is it depends.
  9. Investing

    Target Prices: The Key to Sound Investing

    Learn how to evaluate the legitimacy of target prices and why investors should trust them over ratings.
RELATED FAQS
  1. How do I calculate the P/E ratio of a company?

    The P/E ratio shows whether a company's stock price is overvalued or undervalued and can reveal how a stock's valuation compares ... Read Answer >>
  2. What does the forward p/e indicate about a company?

    Explore the forward price to earnings ratio and learn its significance and how it compares to the traditional price to earnings ... Read Answer >>
  3. What is the average price-to-earnings ratio in the banking sector?

    Explore the price/earnings ratio in regard to the banking industry and learn what the average P/E ratio is for most banking ... Read Answer >>
  4. Absolute P/E Ratio Vs. Relative P/E Ratio

    The difference between absolute P/E and relative P/E is easier when you know why each term is used. Read Answer >>
  5. How can EV/EBITDA be used in conjunction with the P/E ratio?

    Learn how traders and analysts use the two equity evaluation metrics, EV/EBITDA and P/E, together to obtain a more complete ... Read Answer >>
Hot Definitions
  1. Business Cycle

    The business cycle describes the rise and fall in production output of goods and services in an economy. Business cycles ...
  2. Futures Contract

    An agreement to buy or sell the underlying commodity or asset at a specific price at a future date.
  3. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  4. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  5. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  6. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
Trading Center