## 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:

Next Up

## 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. ### Multiple Compression

Multiple compression is when a company's P/E ratio is reduced ...
2. ### Enterprise Multiple

Enterprise multiple is a measure (the company's enterprise value ...
3. ### Trailing Price-To-Earnings - Trailing ...

The sum of a company's price-to-earnings, calculated by taking ...
4. ### Realization Multiple

The realization multiple measures the actual money paid back ...
5. ### P/E 10 Ratio

The P/E 10 ratio is a valuation measure, generally applied to ...
6. ### Value

Value is the monetary, material or assessed worth of an asset, ...
Related Articles
1. Investing

### 5 Common Trading Multiples Used In Oil And Gas Valuation

Before you decide to invest in oil and gas, you should understand these multiples.

### Value-Priced Stocks to Watch in 2016 (AMBC, VIPS)

In terms of P/E and Forward P/E these stocks are trading at low valuations. Watch these technical price levels for buying opportunities in 2016.
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

### Comparing the P/E, EPS And Earnings Yield

Here are three ratios that help investors value stock returns.
5. Investing

### How to choose the best stock valuation method

There are many valuation methods available to investors, each with unique characteristics. Here, we'll explore the most common valuation methods – and when to use them.
6. Investing

### Analyzing the Price-to-Cash-Flow Ratio

Find out how analyzing the price-to-cash-flow ratio can help you make batter investment decisions.
7. Investing

### Understanding The P/E Ratio

Learn what the price/earnings ratio really means and how you should use it to value companies.
RELATED FAQS
1. ### Which metric should I pay more attention to, EV/EBITDA or P/E?

Examine and compare the relative advantages and disadvantages of the two equity evaluation metrics, EV/EBITDA and the price-to-earnings ... Read Answer >>
2. ### How can I find a company's EV/EBITDA multiple?

Learn what the EV/EBITDA equity valuation metric is, how it is calculated and what information investors and analysts obtain ... Read Answer >>
3. ### What is the average price-to-earnings ratio in the telecommunications sector?

Discover the average trailing and forward price-to-earnings ratios for the telecommunications sector and the usefulness of ... Read Answer >>
4. ### What is the average price-to-earnings ratio in the food and beverage sector?

Learn what the average price-to-earnings ratio is in the food and beverage sector and why other measures such as median should ... Read Answer >>
Hot Definitions
1. ### Gross Margin

A company's total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. ...
2. ### Inflation

Inflation is the rate at which prices for goods and services is rising and the worth of currency is dropping.
3. ### Discount Rate

Discount rate is the interest rate charged to commercial banks and other depository institutions for loans received from ...
4. ### Economies of Scale

Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
5. ### Quick Ratio

The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
6. ### Leverage

Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...