What is a Price Multiple?
A price multiple is a ratio that combines some measure of a company's performance and the company's stock price.
How Does a Price Multiple Work?
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:
Why Does a Price Multiple Matter?
There are a plethora of price multiples, but some of the most common include: