Step #3 of our approach to comprehensive valuations
What Is a Price Multiple?
A price multiple is a ratio that uses a company’s share price in combination with a per-share financial metric. Using Price Multiples can help you predict better investment targets. Investors and analysts use price multiples to gain insight into a company’s valuation as part of the process of reviewing a company for potential investment. Common price multiples include price-to-earnings (P/E) ratios, price-to-sales (P/S) ratios, and price-to-cash flow (P/CF) ratios.
Benefits of Price Multiples
Using Price Multiples can help you predict better investment targets. Build a foundation for making valuations and understanding a stock’s performance characteristics. Price multiples serve an important purpose in providing a static and forward glance at a stock’s valuation. The multiples are used to compare present and future (forecasted) valuation multiples of a company with its historical figures and with those of its peers.
What Is Valuation?
Valuation is the analytical process of finding the current (or projected) worth of an asset or a company. There are many techniques used for doing a valuation. An analyst placing a value on a company looks at the business’s management, the composition of its capital structure, the prospect of future earnings, and the market value of its assets, among other metrics.
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