What Is a Multiple?

A multiple measures some aspect of a company's valuation and financial performance, determined by dividing one metric&n💮bsp;by another metric. It is common that investors use multiples to assess the overpricing or underpricing of a company's stock price, quantify a company's growth, productivity, and efficiency, and compare them to other companies in the same industry or to the market overall. They use multiples to set a baseline and make comparisons among companies and find the best investment opportunities form valuat𝄹ion point of view.

Types of multiples include price-to-earnings (P/E), 澳洲幸运5官方开奖结果体彩网:enterprise value (EV) to sales multiples, entreprise value (EV) to EBITDA, and entreprise value (EV) to EBIT.

Formula and Calculation of Multiples

The formula for calculating multiples is:

$\begin{aligned}&\text{Multiple}=\frac{\text{Performance Metric ``A''}}{\text{Performance Metric ``B''}}\end{aligned}$​Multiple=Performance Metric “B”Performance Metric “A”​​

To calculate the multiple, divide the first metric by the second metric. Keep in mind that the metric in the numerator is typically larger than the one in the denominat♏or.

Understanding Multiples

Metrics are quantitative tools that measure a company's performance. These metrics are used by different people for various reasons. For instance, company executives use metrics to analyze 澳洲幸运5官方开奖结果体彩网:corporate finance and operational strategies. Similarly, analysts can use metrics to make opinions and inve🏅stment recommendations while investment professionals use metrics to make important decisions about their investing portfolios.

Metrics can be used together to measure a company's 澳洲幸运5官方开奖结果体彩网:financial health and well-being. When gr༺ouped together, these metrics are called multiples. As noted above, when one metric is divided by another, it results in a multiple. This figure can be used to make different de♒terminations.

For instance, investors and analysts generally rely on two major methods when they make stock 澳洲幸运5官方开奖结果体彩网:valuations, One is based on cashꦓ flow, while the other is based on a multiple of some performance measure, such as earnings or sales.

• Valuation based on cash flow, such as the 澳洲幸运5官方开奖结果体彩网:discounted cash flow analysis, is considered to be an intrinsic valuation
• Valuation based on a multiple is considered to be relative because the multiple is relative to some performance measure

The 澳洲幸运5官方开奖结果体彩网:multiples approach to valu⛎ation is a theory based on the co♊ncept that similar assets should sell for similar prices.

Types of Multiples

Price-to-Earnings (P/E) Multiple

The most common multiple used in the valuation of stocks is the 澳洲幸运5官方开奖结果体彩网: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 h🐓as 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 five times (5x) means a company’s stock is trading at a multiple of five times its earnings. A P/E of 10 times (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 澳洲幸运5官方开奖结果体彩网:overvalued. Likewise, a company with a low P/E is considered to be 澳洲幸运5官方开奖结果体彩网:undervalued.

EV/EBITDA Multiple

EV is a popular performance metric used to calculate different types of multiples. EV shows how much money would be needed to buy a specific company. The EV of a company is calculated by taking the company's 澳洲幸运5官方开奖结果体彩网:market capitalization, adding total deb𒁃t, including long-term and short-term debt, and subtracting all ca𒈔sh and cash equivalents.

Many investors see EV as a better performance metric than relying on market capitalization alone because it offers a more complete picture of a company's valuation.

A widely used multiple is the EV to earnings before interest, taxes, depreciation, and a⛎mortization (EBITDA) multiple, also referred to as 澳洲幸运5官方开奖结果体彩网:EV/EBITDA. This multiple helps investors compare🌞 companies in the same industry or sector befor💫e making an investment decision.

EV/EBIT Multiple

The EV to earnings before interest and taxes (EBIT) multiple, also referred to as EV/EBIT, is similar to the P/E multiple, but is preferredᩚᩚᩚᩚᩚᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ𒀱ᩚᩚᩚ by some analysts for its ability to give a more complete picture of a company's financial performance and actual worth.

The multiple is useful for pinpointing companies that might be undervalued or overvalued. It's best used for less capital-intensive companies, with fewer depreciation and 澳洲幸运5官方开奖结果体彩网:amortization expenses.

EV/Sales Multiple

The EV to sales or the EV/sales sales multiple compares a company's enterprise value to its annual sales. T✤his multiple is considered an important valuation tool because it takes into account a company's equity and debt while giving investor𓂃s a quantifiable metric of how to value a company based on sales.

It's also useful in evaluating companies with 澳洲幸运5官方开奖结果体彩网:negative earnings. To be most effective, investo൩rs should compare the EV/sales multiple of the company they are analyzing to that ꦏof other companies in the same industry.

Example of a Multiple

A multiple can be used to show how much investors are willing to pay per dollar of earnings, as computed by the P/E ratio. Let's assume that you are analyzing a stock with $2 of 澳洲幸运5官方开奖结果体彩网: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.

The Bottom Line

There are many tools you can use to evaluate the health and well-being of different companies. Multiples allow you to highlight their growth, how efficient they are, and how well they're performing. This is done by dividing one metric by another. Price-to-earnings and enterprise value-to-sales are just two common multiples that analysts and investors can use. To ensure that your analysis is as accurate as possible, make sure you use different multiples rather than relying on one set.