Ticker League

The multiples toolkit — and when each one lies

P/E, EV/EBITDA, P/S, PEG. Every analyst uses them — and every beginner misuses them. This lesson is about knowing which multiple applies when, and recognizing the moment a multiple is quietly leading you to the wrong conclusion.

Reading time: 30 mins

Lesson 1 / 6

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 mental model
Think of multiples as different lenses. Each one is sharp for some companies and blurry for others. A professional doesn’t have a favorite multiple — they pick the lens that fits the business in front of them.

The four core multiples — formula, use, and abuse

These four cover the vast majority of valuation work. Open each tab to understand not just what it is, but precisely when to trust it and when to ignore it.

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.

Select a sector above to understand its valuation context.
The rule
Never judge a multiple against an absolute number. Always judge it against the company’s own history, its direct peers, and its sector. A 30× P/E software company can be cheaper than a 12× P/E retailer — if the software grows three times faster.

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

Practice on real data
Use the Rankings to compare P/E, EV/EBITDA, and P/S across companies in the same sector. Find the genuine outliers — and ask yourself whether each is a bargain or a trap.

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?

Frequently asked questions