Valuation Multiples (P/E, P/B, EV/EBITDA)

Valuation Multiples

After assessing quality, the next question is: what price am I paying for that quality? Multiples are the market's shorthand answer.

P/E Ratio

P/E = Market Price ÷ Earnings Per Share (EPS)

The most widely quoted multiple. Reflects how many years of current earnings investors are paying upfront.

Trailing vs Forward P/E: - Trailing P/E uses last 12 months of actual earnings - Forward P/E uses next 12 months of estimated earnings - When a stock is "cheap on forward P/E", make sure the estimates are credible

PEG Ratio = P/E ÷ Earnings Growth Rate Adjusts P/E for growth. PEG < 1 is often considered undervalued.

P/B Ratio

P/B = Market Cap ÷ Book Value of Equity

Book value = shareholder equity = assets minus liabilities.

Best for: banks, financials, asset-heavy businesses. Weakness: intangible-heavy companies (software, pharma) have low book value that understates real worth.

• •P/B < 1 → market prices it below liquidation value (value trap or bargain)
• •P/B 1-3 → reasonable for most sectors
• •P/B > 10 → only justified by very high ROE over long periods

EV/EBITDA

EV/EBITDA = Enterprise Value ÷ EBITDA

Capital-structure neutral - unaffected by how much debt a company has, making it ideal for comparing companies with different leverage.

Price-to-Sales (P/S)

Used when a company is not yet profitable. Revenue is harder to manipulate than earnings. - High-growth SaaS: 10-20x P/S is common - Profitable mature businesses: 1-3x P/S

The Importance of Context

A P/E of 30 is: - Cheap for a company growing 35% a year - Expensive for a company growing 5% a year - Meaningless for a company with volatile or negative earnings

Always pair a multiple with a growth rate and return on capital.

Key Takeaways

• •No single multiple works for every business - use P/E for earnings-driven companies, P/B for financials, EV/EBITDA for comparing across capital structures
• •Multiples are relative tools - compare to history, peers, and the broader market
• •Cheap on a multiple is only attractive if the underlying business is healthy