Last updated on Oct 17, 2023
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Price-to-earnings (P/E)
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2
Enterprise value-to-EBITDA (EV/EBITDA)
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3
Price-to-book (P/B)
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4
Price-to-sales (P/S)
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5
Price-to-cash flow (P/CF)
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6
Here’s what else to consider
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Valuation multiples are ratios that compare the market value of a company or an asset to its financial performance, cash flow, or book value. They are widely used in finance to estimate the fair value of a company, compare it to its peers, or evaluate its potential for growth or acquisition. In this article, we will explain what are the most common valuation multiples used in finance and how to interpret them.
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1 Price-to-earnings (P/E)
The price-to-earnings ratio, or P/E, is the most popular valuation multiple. It measures how much investors are willing to pay for each dollar of earnings generated by a company. The higher the P/E, the more expensive the company is relative to its earnings. A low P/E could indicate that the company is undervalued or has low growth prospects. To calculate the P/E, you divide the market price per share by the earnings per share (EPS).
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2 Enterprise value-to-EBITDA (EV/EBITDA)
The enterprise value-to-EBITDA ratio, or EV/EBITDA, is another common valuation multiple. It compares the total value of a company, including its debt and cash, to its earnings before interest, taxes, depreciation, and amortization (EBITDA). This ratio reflects the cash-generating ability of a company and its operational efficiency. The lower the EV/EBITDA, the cheaper the company is relative to its cash flow. A high EV/EBITDA could imply that the company is overvalued or has high growth potential. To calculate the EV/EBITDA, you divide the enterprise value by the EBITDA.
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3 Price-to-book (P/B)
The price-to-book ratio, or P/B, is a valuation multiple that compares the market value of a company to its book value, or the net value of its assets minus its liabilities. It indicates how much investors are paying for the equity of a company. The higher the P/B, the more expensive the company is relative to its book value. A low P/B could suggest that the company is undervalued or has low profitability. To calculate the P/B, you divide the market price per share by the book value per share.
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4 Price-to-sales (P/S)
The price-to-sales ratio, or P/S, is a valuation multiple that compares the market value of a company to its revenue. It measures how much investors are paying for each dollar of sales generated by a company. The higher the P/S, the more expensive the company is relative to its sales. A low P/S could indicate that the company is undervalued or has high margins. To calculate the P/S, you divide the market price per share by the revenue per share.
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5 Price-to-cash flow (P/CF)
The price-to-cash flow ratio, or P/CF, is a valuation multiple that compares the market value of a company to its cash flow from operations. It shows how much investors are paying for each dollar of cash flow generated by a company. The higher the P/CF, the more expensive the company is relative to its cash flow. A low P/CF could signal that the company is undervalued or has strong cash flow generation. To calculate the P/CF, you divide the market price per share by the cash flow per share.
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6 Here’s what else to consider
This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?
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