Equity multiples

Definition

Equity multiples are financial metrics used to assess the relative value of a company's stock. They compare the market price of equity to specific financial performance measures like earnings, sales, or book value.

5 Must Know Facts For Your Next Test

1. Equity multiples help investors determine if a stock is overvalued or undervalued compared to its peers.
2. The Price-to-Earnings (P/E) ratio is one of the most commonly used equity multiples.
3. A lower P/E ratio may indicate that a stock is undervalued, while a higher P/E ratio may suggest it is overvalued.
4. Other common equity multiples include Price-to-Book (P/B) and Price-to-Sales (P/S) ratios.
5. Equity multiples can vary significantly between industries, making industry comparison crucial for accurate valuation.

Review Questions

• What does a high P/E ratio generally indicate about a stock?
• Why is it important to consider industry context when using equity multiples?
• Name two other types of equity multiples besides the P/E ratio.

Related terms

Price-to-Earnings (P/E) Ratio: A measure that compares the current share price of a company to its per-share earnings.

Price-to-Book (P/B) Ratio: A ratio used to compare a firm's market value to its book value.

Price-to-Sales (P/S) Ratio: A valuation metric that compares a company's stock price to its revenues.