4. Multiplier Models
g. explain the rationale for using price multiples to value equity, how the price to earnings multiple relates to fundamentals, and the use of multiples based on comparables;
h. calculate and interpret the following multiples: price to earnings, price to an estimate of operating cash flow, price to sales, and price to book value;
What is a price multiple?
A price multiple is a ratio of a stock's price to a measure of value per share, such as earnings, assets, sales, or cash flows.
What is a P/E Ratio (earnings multiplier)?
The P/E ratio compares stocks on the basis of how many dollars an investor is willing to pay for a dollar of expected earnings.
What is trailing vs leading P/E?
- A trailing P/E (also current P/E) is a price multiple comparing the stock's current market price to the company's earnings during the last four fiscal quarters.
- A leading P/E (also forward P/E or prospective P/E) is a price multiple comparing the stock's current market valuation with the company's forecasted earnings for the next full fiscal year or for the next four quarters.
What is a price-to-book ratio?
A price-to-book ratio is a price multiple comparing a company's current market share price to its book value per share.
What is a P/S multiple?
A P/S multiple is a price multiple that divides the price per share by the last 12 months' net sales per share.
What is a price-to-cash-flow ratio?
A price-to-cash-flow ratio equals market price per share / cash flow per share.