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115 CFA
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115.060.06.04 Equity Investments - Reading 41 - 4. Multiplier Models

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.


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  • CFA