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
Understanding Price Multiple
The lingua franca of the 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
Investors should use only the price multiples that are relevant to a given industry. 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 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 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.