Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Price Multiple

What it is:

A price multiple is a ratio that combines some measure of a company's performance and the company's stock price.

How it works (Example):

In general, a price multiple ratio looks like this:

Price multiple = Price / Performance Metric

For example, Company XYZ has revenue of $20,000,000 per year. It has 1,000,000 shares outstanding. Today, the company’s stock price is $20 per share. Using the formula above, we can calculate Company XYZ's price-to-revenue multiple:

Revenue multiple = $20 / ($20,000,000/1,000,000) = 1.0

In Company XYZ’s industry, most companies trade at or below a 0.80 multiple, implying that Company XYZ is overvalued.

Why it Matters:

There are a plethora of price multiples, but some of the most common include:

Price / EPS
Price / EBITDA per share
Price / Book value of assets per share
Price / Revenues per share

Price multiples are usually used to gain some insight about whether a company's stock price (and thus a company's value) is too high or too low.

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