## What is a 'Price Multiple'

A price multiple is any ratio that uses the share price of a company in conjunction with some specific per-share financial metric for a snapshot on valuation. The share price is typically divided by a chosen per-share metric to form a ratio.

Price multiple = share price / per-share metric

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## BREAKING DOWN 'Price Multiple'

The lingua franca of simple valuation of a company is a price multiple. It is understood by investors anywhere around the world and accepted as a standard by all interested parties in a stock. Some common price multiples are the price-to-earnings (P/E) ratio, price-to-forward earnings (Forward P/E), price-to-book (P/B) ratio, and price-to-sales (P/S) ratio. Other ratios include price-to-tangible book (P/TBV), price-to-cash flow (P/CF), price-to-EBITDA (P/EBITDA) and price-to-free cash flow (P/FCF). These price multiples are easy to compute on the surface, but care must be taken to analyze the components of the denominator to make sure the numbers are clean - i.e., no extraordinary items, one-offs or non-recurring factors that may distort a normalized financial metric.

Price multiples serve an important purpose in providing a static and forward glance at a stock's valuation. The multiples are used to compare present and future (forecasted) valuation multiples of a company with its historical figures and with those of its peers.

## To P/E or Not to P/E

Only the price multiples that are relevant to a given industry should be used by investors. A P/E ratio would be an appropriate valuation measure for a technology firm, but not necessarily for a capital-intensive utility company that charges a significant amount of depreciation to earnings. In this case, the non-cash charge will lower GAAP earnings and thus reduce earnings per share (EPS), which may lead to a false impression about the company's valuation. Sometimes P/E is thrown out the window. Slack-jawed non-owners of Amazon stock who have been looking for some sort of reasonable P/E for years and years have come (or should already have come) to the realization that the P/E multiple, or lack thereof, in Amazon's case has not mattered one iota. It may in the future, but owners of Amazon stock who have ignored this price multiple are clear winners.

## Where to Find Price Multiples

Most financial websites display the basic price multiples such as P/E, P/B or P/S. The ratios are typically calculated on a trailing twelve month (TTM) or last calendar period basis. For the more serious investor, hand calculations of multiples that are relevant to a particular industry can be done with data provided by companies in their financial reports.

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