A multiple is just a ratio of price to something
Every valuation multiple answers the same question in a different way: how much am I paying, relative to what I’m getting? The “what I’m getting” changes — earnings, cash flow, revenue, growth — and each choice reveals something different about the business.
The skill isn’t memorizing formulas. It’s knowing which denominator matters for which kind of company. A multiple that’s perfect for a bank is useless for a biotech. Get this wrong and you’ll confidently conclude a stock is cheap when it’s expensive — or vice versa. The P/E ratio is the place most people start.
The four core multiples — formula, use, and abuse
These four cover the vast majority of valuation work. The table below gives a static reference — formula, when to reach for it, and when it misleads. The interactive explorer beneath lets you dive into the intuition behind each.
| Multiple | Formula | Use it when | Avoid it when |
|---|---|---|---|
| P/E | P/E = Share price ÷ Earnings per share | Mature, profitable companies with stable earnings · Comparing companies within the same sector · When earnings are a clean reflection of the business | Companies with no profit (P/E is meaningless or negative) · Highly cyclical businesses at peak or trough earnings · When one-time items distort net income · Capital-intensive firms with huge depreciation |
| EV/EBITDA | EV/EBITDA = Enterprise value ÷ EBITDA | Companies with different debt structures · Capital-intensive industries (telecom, energy, industrials) · M&A analysis — acquirers think in enterprise value · When depreciation heavily distorts net income | Financial companies (banks, insurers) — debt is their raw material · Asset-light businesses where EBITDA ≈ earnings anyway · When capex is huge and EBITDA flatters cash flow misleadingly |
| P/S | P/S = Market cap ÷ Annual revenue | High-growth companies not yet profitable · Early-stage SaaS, biotech, emerging tech · When earnings are temporarily negative or volatile · Cross-checking whether a P/E is built on thin margins | Comparing across sectors with different margin profiles · Low-margin businesses ($1 of grocery revenue ≠ $1 of software revenue) · As a standalone measure — must pair with margin analysis |
| PEG | PEG = P/E ÷ Annual EPS growth rate (%) | Growth companies where a high P/E looks scary in isolation · Comparing fast-growers against slow-growers fairly · Sanity-checking whether premium valuations make sense | Companies with erratic or unpredictable growth · Very mature companies with near-zero growth (PEG explodes) · Relying on optimistic analyst growth estimates uncritically |
multiples-reference.md
P/E = Share price ÷ Earnings per share
What it measures
The most widely used multiple. Tells you how many dollars you pay for each $1 of annual profit. A P/E of 20 means investors pay $20 for $1 of current earnings.
The intuition
Effectively, how many years of current earnings it takes to "pay back" the price, assuming earnings stay flat.
Use it when
- Mature, profitable companies with stable earnings
- Comparing companies within the same sector
- When earnings are a clean reflection of the business
Avoid it when
- Companies with no profit (P/E is meaningless or negative)
- Highly cyclical businesses at peak or trough earnings
- When one-time items distort net income
- Capital-intensive firms with huge depreciation
The same P/E means opposite things in different sectors
Here’s the mistake that costs beginners the most: judging a multiple in isolation. A P/E of 15 is not “cheap” or “expensive” on its own — it depends entirely on the sector. Select each sector to see its typical P/E and why.
Typical P/E ratios by sector
Select any sector to understand why its valuation runs high or low.
Three traps that make cheap look expensive — and vice versa
Each card below shows a company with a multiple that seems to scream one thing. Reveal what’s actually going on beneath the surface.
Spot the deception
Select each card to reveal what the naive reading misses.
The professional’s checklist for any multiple
Before you ever conclude a stock is cheap or expensive based on a multiple, run through these five questions. They prevent almost every common valuation error.
1. Right multiple for this business type?
Bank → P/B or P/E · Growth tech → P/S or EV/Sales · Mature → P/E or EV/EBITDA · Cyclical → normalized earnings
2. Compared to the right benchmark?
vs sector peers, vs its own 5-year history — never against an absolute number
3. Is the denominator distorted?
One-time items, unusual tax rate, depressed or inflated earnings from the cycle
4. Does growth justify the premium?
A high multiple with high growth (low PEG) can be cheaper than a low multiple with no growth
5. What does the multiple imply about the future?
Every multiple is an implicit forecast — make the forecast explicit and test it
Check your understanding
A capital-intensive telecom company carries heavy debt and large depreciation charges. Which multiple gives the most reliable valuation comparison against its peers?
Company A trades at a 35× P/E and grows earnings 30% per year. Company B trades at a 12× P/E and grows earnings 4% per year. Using PEG reasoning, which is “cheaper” relative to its growth?
A stock’s P/E suddenly drops from 20× to 8× after an earnings report, even though the price barely moved. What is the most likely explanation?