****Earnings Multiples by Aswath Damodaran

 

****Earnings Multiples by Aswath Damodaran

https://myinvestingnotes.blogspot.com/2009/11/earnings-multiples-by-aswath-damodaran.html

PE Ratio and Fundamentals

Proposition: Other things held equal, higher growth firms will have higher PE ratios than lower growth firms.

Proposition: Other things held equal, higher risk firms will have lower PE ratios than lower risk firms

Proposition: Other things held equal, firms with lower reinvestment needs will have higher PE ratios than firms with higher reinvestment rates.

Of course, other things are difficult to hold equal since high growth firms, tend to have risk and high reinvestment rates.


PEG Ratios and Fundamentals: Propositions

Proposition 1: High risk companies will trade at much lower PEG ratios than low risk companies with the same expected growth rate.

• Corollary 1: The company that looks most under valued on a PEG ratio basis in a sector may be the riskiest firm in the sector

Proposition 2: Companies that can attain growth more efficiently by investing less in better return projects will have higher PEG ratios than companies that grow at the same rate less efficiently.

• Corollary 2: Companies that look cheap on a PEG ratio basis may be companies with high reinvestment rates and poor project returns.

Proposition 3: Companies with very low or very high growth rates will tend to have higher PEG ratios than firms with average growth rates. This bias is worse for low growth stocks.

• Corollary 3: PEG ratios do not neutralize the growth effect.


Relative PE: Definition

The relative PE ratio of a firm is the ratio of the PE of the firm to the PE of the market.

Relative PE = PE of Firm / PE of Market
While the PE can be defined in terms of current earnings, trailing earnings or forward earnings, consistency requires that it be estimated using the same measure of earnings for both the firm and the market.

Relative PE ratios are usually compared over time. Thus, a firm or sector which has historically traded at half the market PE (Relative PE = 0.5) is considered over valued if it is trading at a relative PE of 0.7.

The average relative PE is always one.

The median relative PE is much lower, since PE ratios are skewed towards higher values. Thus, more companies trade at PE ratios less than the market PE and have relative PE ratios less than one.

=====

Simple Summary:

Think of a company's stock price like the price tag on a car.

1. PE Ratio = Price tag ÷ yearly earnings

• Faster growth = higher price tag (like a newer model)

• More risky = lower price tag (like a car with problems)

• Needs lots of repairs/reinvestment = lower price tag (takes money to maintain)

2. PEG Ratio = (PE Ratio) ÷ growth rate
Tries to be "fair" by considering growth, but has problems:

• Doesn't account for risk (a dangerous but fast-growing company looks cheap)

• Doesn't account for efficiency (a company that spends wastefully looks cheap)

• Doesn't work well for very slow or very fast growers

3. Relative PE = Your car's price ÷ average car price

• Helps see if your car is expensive compared to the market

• Most cars are cheaper than average (because a few super-expensive cars pull the average up)

• Best used to compare over time (is your car more expensive than it usually is?)

Big Picture:
You can't just look at the price tag alone. You need to ask:

• Is it growing fast?

• Is it risky?

• Does it need lots of maintenance spending?

Two companies with the same PE might be completely different—one might be a safe, efficient grower while the other is a risky, wasteful grower. The numbers tell the story only when you understand what's behind them.

Not all growth is created equal.

Good Growth (Valuable) = Higher PE
This is efficient, profitable, and sustainable growth. The company grows its earnings by:

• Reinvesting a smaller amount of money

• Into projects with high returns (like 20-30% returns)

• While taking on reasonable risk

Example: A software company that grows 15% per year simply because its existing customers love the product and pay more (high margins, low extra cost). This deserves a high price tag (high PE).

Bad Growth (Destructive) = Lower PE
This is inefficient, unprofitable, or risky growth. The company grows by:

• Reinvesting a massive amount of money (eating up cash flow)

• Into projects with low or mediocre returns (like 5-8% returns, maybe below its own cost of capital)

• While taking on high risk

Example: A construction company that only grows by taking on huge, low-margin projects with lots of debt. It's growing revenue, but destroying shareholder value. This deserves a lower price tag (low PE).

---

Why the PEG Ratio Fools People:
A company with Bad Growth might look cheap on a PEG ratio because it has a low PE (bad) divided by a high growth rate (seemingly good).

PEG = (Low PE due to bad growth) / (High Growth Rate from risky projects)

The math gives you a small, "attractive" PEG number, tricking you into thinking it's a bargain. In reality, the market has given it a low PE for a good reason—its growth is dangerous or wasteful.

That's why Damodaran says: "Other things are difficult to hold equal." The moment you see high growth, you must immediately ask: "At what cost and at what risk?"

=====

More detailed discussion:

These are key principles from Aswath Damodaran’s work. 

Summary & Core Idea

Damodaran systematically links valuation multiples (PE, PEG, Relative PE) to the three fundamental drivers of value: Growth, Risk, and Reinvestment (which drives cash flows). The central theme is that multiples are not arbitrary but are determined by these underlying financial realities.

---

Elaboration & Commentary

1. PE Ratio and Fundamentals

Damodaran’s three propositions decompose the standard discounted cash flow model into its PE implications:

• Growth ↑ → PE ↑: Because future earnings are more valuable.

• Risk ↑ → PE ↓: Higher discount rate reduces present value.

• Reinvestment Needs ↑ → PE ↓: More capital must be plowed back to sustain growth, reducing free cash flow to equity.

Key Insight: In practice, these variables are correlated. High-growth firms often face higher risk and require high reinvestment, creating a natural tension. A firm with high growth but very high risk and reinvestment may still have a low PE. This explains why a simplistic “high PE = overvalued” approach fails.

2. PEG Ratios and Fundamentals

The PEG ratio (PE / Growth Rate) attempts to standardize for growth, but Damodaran shows its severe limitations:

• Proposition 1: Risk is ignored in PEG. A risky firm with high growth may have a deceptively low PEG, luring investors who don’t adjust for risk (Corollary 1).

• Proposition 2: Reinvestment efficiency (ROIC vs. Cost of Capital) matters. Two firms with 20% growth aren’t equal if one achieves it by investing 50% of earnings at a 40% return, and the other invests 80% at a 25% return. The more efficient firm deserves a higher PEG (Corollary 2 warns of “cheap” PEG traps).

• Proposition 3: PEG is non-linear and skewed. Very low-growth firms (<5%) often have high PEs due to stable cash flows or dividend yields, inflating PEG. Very high-growth firms (>30%) often have high PE due to anticipation of sustained advantage. Thus, comparing a 2% growth firm (PEG=15) to a 25% growth firm (PEG=1) is misleading.

Bottom line: PEG does not neutralize growth and can be dangerously misleading across different risk, return, and growth ranges.

3. Relative PE

Relative PE (Firm PE / Market PE) is a normalization metric to compare across time or against historical norms.

• It controls for market-level interest rates, risk premiums, and macroeconomic conditions affecting all PEs.

• Comparison over time is its strength: If a firm historically traded at 0.8× market PE but now trades at 1.2×, it signals overvaluation relative to its own history, assuming fundamentals haven’t changed.

• Skewness note: Damodaran highlights that the average relative PE is 1.0 (by definition), but the median is less than 1 because the PE distribution has a long right tail (some very high PE firms pull the average up). This means more than half of firms trade below the market PE—a crucial statistical insight often missed.

---

Critical Implications & Practical Use

1. Multiples are proxies for DCF: Every multiple embeds assumptions about growth, risk, and reinvestment. Use them only after understanding what those assumptions are.

2. PEG is flawed but popular: Its simplicity drives its use, but it’s unreliable for cross-sectional comparisons unless firms have similar risk, reinvestment needs, and growth rates. Better to use a PEG adjusted for risk and ROIC.

3. Relative PE for historical context: More useful than absolute PE when judging whether a stock is expensive relative to its own historical range or the market cycle.

4. The “other things held equal” caveat: This is the entire challenge in practice. When comparing multiples, you must ask: Are growth, risk, and reinvestment profiles similar? If not, difference in multiples may be justified.

5. Screening pitfalls: Screening for low PE or low PEG often selects firms with high risk, poor growth prospects, or low efficiency—precisely the “value traps.”

Using Multiples

The use of multiples can increase valuations based on DCF analysis.

There are five requirements for making useful analyses of comparable multiples:

1. value multibusiness companies as a sum of their parts,
2. use forward estimates of earnings,
3. use the right multiple,
4. adjust the multiple for nonoperating items, and,
5. use the right peer group.

1.  Value Multibusinesses companies as a sum of their parts

Multibusiness companies' various lines of business typically have very different growth and ROIC expectations.

These firms should be valued as a sum of their parts.



2,  All Multples should use forward estimates of earnings

All multiples should be forward-looking rather than based on historical data, as valuation of firms is based on expectations of future cash flow generation.


3.  Use the Right Multiples

(a) Value-to-EBITA & P/E Multiples

The right multiple is often the value-to-EBITA ratio.

This measure is superior to the price-to-earnings (P/E) ratio because:

• capital structure affects P/E and 
• nonoperating gains and losses affect earnings.

(b) Alternative Multiples

Alternatives to the value-to-EBITA and P/E multiples include

• the value-to-EBIT ratio, 
• the value-to-EBITDA ratio, 
• the value-to-revenue ratio, 
• the price-to-earnings-growth (PEG) ratio, 
• multiples of invested capital, and 
• multiples of operating metrics.

4.  Adjust the multiples for nonoperating items

All of these ratios should be adjusted for the effects of nonoperating items.



5.  Use the right Peer Group

The peer group is important.

The peer group should consist of companies whose underlying characteristics (such as production methodology, distribution channels, and R&D) lead to similar growth and ROIC characteristics.

Price Multiples - Relative Valuation

Price multiples are ratios that compare the price of a stock to some sort of value.

Price multiples allow an analyst to evaluate the relative worth of a company's stock.

Popular multiples used in relative valuation include:

• price-to-earnings,
• price-to-sales,
• price-to-book, and
• price-to-cash flow.

Business value cannot be precisely determined. Make use of ranges of values.

Business value cannot be precisely determined. 

Not only do a number of assumptions go into a business valuation, but relevant macro and micro economic factors are constantly changing, making a precise valuation impossible. 

Although anyone with a calculator or a spreadsheet can calculate a net present value of future cash flows, the precise values calculated are only as accurate as the underlying assumptions.

Investors should instead make use of ranges of values, and in some cases, of applying a base value. 

Ben Graham wrote:

The essential point is that security analysis does not seek to determine exactly what is the intrinsic value of a given security. It needs only to establish that the value is adequate—e.g., to pro­tect a bond or to justify a stock purchase—or else that the value is considerably higher or considerably lower than the market price. For such purposes an indefinite and approximate measure of the intrinsic value may be sufficient.

There are only three ways to value a business. 

1.   The first method involves finding the net present value by discounting future cash flows. 

Problems with this method involve trying to predict future cash flows, and determining a discount rate. 

Investors should err on the side of conservatism in making assumptions for use in net present value calculations, and even then a margin of safety should be applied.

2.  The second method is Private Market Value using Multiples. 

This is a multiples approach (e.g. P/E, EV/Sales) based on what business people have paid to acquire whole companies of a similar nature. 

The problems with this method are that comparables assume businesses are all equal, which they are not. 

Furthermore, exuberance can cause business people to make silly decisions. 

Therefore, basing your price on a price based on irrationality can lead to disaster. 

This is believed to be the least useful of the three valuation methods.

3.  Finally, liquidation value as a method of valuation. 

A distinction must be made between a company undergoing a fire sale (i.e. it needs to liquidate immediately to pay debts) and one that can liquidate over time. 

Fixed assets can be difficult to value, as some thought must be given to how customised the assets are (e.g. downtown real-estate is easily sold, mining equipment may not be).

When should each method be employed? 

They can all be used simultaneously to triangulate towards a value. 

In some cases, however, one might place more confidence in one method over the others. 

For example, 

• liquidation value would be more useful for a company with losses that trades below book value, while 
• net present value is more useful for a company with stable cash flows.

Using the methods of valuation described, you can search for stocks that are trading at a severe discount; it is possible, their stock price more than doubled soon after.

Beware of these failures

The failures of relying on a company's earnings per share - too easily massaged.

The failure of relying on a company's book value  - not necessarily relevant to today's value.

The failure of relying on a company's dividend yield - incentives of management to make yields appear attractive at the expense of the company's future.

Read also:

• 
  
• Your investments using Mutual Funds or Money Managers
• Trading and portfolio management from a value investing point of view
• Value Investor's Opportunities in Distressed Securities
• Value Investing Opportunities in the Banking Sector
• Look at FUNDAMENTALS and POTENTIAL CATALYSTS when making investment decisions
• Where to look for Investment Opportunities
• Business value cannot be precisely determined. Make use of ranges of values
• Central elements to a Value Investing Philosophy
• The Philosophy of Value Investing and Why It Works
• Philosophy of value investing. Need to have clear strategies too
• How Wall Streets can create investment fads? The Junk Bond Market of mid-1980s
• Understanding these changes in the investment world allows investors to earn superior returns
• What's good for Wall Street is not necessarily good for investors
• Speculators, Investors and Market Fluctuations

PE multiple is rooted in discounting theory

Valuation using multiples has its fundamentals rooted in discounting.  It is a shortcut to valuation.

In this method, all factors considered in a general DCF including cost of capital and growth rates are compressed in one figure, namely the multiple figure.  Multiples are also market-based.


Let's look at PE in detail.

PE =  Price / Earnings

Price
= PE x Earnings
= Earnings / (1/PE)


Compare this with the time-value of money equation:

PV = FV / (1+r)^n

or the dividend growth model:

PV = Div1 / (r-g)


Thus a PE multiple of 5 should nearly imply a discount rate of 20%.

The same goes for other kinds of multiples used in the financial markets:
EV/EBITDA multiples
EV/Sales
Price/Cash flow.

They are all short cuts for discounting.  The EBITDA, Sales and Cash flows are all proxies of the free cash flow.

DEFINITION OF 'DISCOUNTED CASH FLOW - DCF'

A valuation method used to estimate the attractiveness of an investment opportunity. Discounted cash flow (DCF) analysis uses future free cash flow projections and discounts them (most often using the weighted average cost of capital) to arrive at a present value, which is used to evaluate the potential for investment. If the value arrived at through DCF analysis is higher than the current cost of the investment, the opportunity may be a good one.

Calculated as:

Also known as the Discounted Cash Flows Model.

Reference:  Finance for Beginners  by Hafeez Kamaruzzaman

Finance for Managers - How to value a company? Summary

This chapter has examined the important but difficult subject of business valuation.  It described three approaches:

1.  Asset based:  The first valuation approach is asset-based:  equity book value, adjusted book value, liquidation value, and replacement value.  In general, these methods are easy to calculate and understand, but have notable weaknesses.  Except for replacement and adjusted book methods, they fail to reflect the actual market values of assets; they also fail to recognize the intangible value of an ongoing enterprise, which derives much of its wealth-generating power form human knowledge, skill, and reputation.

2.  Earnings based.  The second valuation approach described is the earnings-based:  P/E method, the EBIT, and EBITDA methods.  The earnings-based approach is generally superior to asset-based methods, but depends on the availability of comparable businesses whose P/E multiples are known.

3.  Cash-flow based.  Finally, the discounted cash flow method, which is based on the concepts of the time value of money.  The DCF method has many advantages, the most important being its future-looking orientation.  This method estimates future cash flows in terms of what a new owner could achieve.  It also recognizes the buyer's cost of capital.  The major weakness of the method is the difficulty inherent in producing reliable estimates of future cash flows.


In the end, these different approaches to valuation are bound to produce different outcomes.  Even the same method applied by two experienced professionals can produce different results.  For this reason, most appraisers use more than one method in approximating the true value of an asset or a business.

Finance for Managers - Earnings-Based Valuation - Earnings Multiple (2)

We calculate the multiple from comparable publicly traded companies as follows:

Multiple = Share Price / Current Earnings

Thus, if XYZ Corporation's shares are trading at $50 per share and its current earnings are $5 per share, then the multiple is 10.  In stock market parlance, we'd say that XYZ is trading at ten times earnings.

We can use this multiple approach to pricing the equity of a non-public corporation if we can find one or more similar enterprises with known price-earnings multiples.  This is a challenge, since no two enterprises are exactly alike.  The uniqueness of every business is why valuation experts recognize their work as part science and part art.  To examine this method further, let's return to our example firm.

Since Amalgamated Hat Rack is a closely held firm, we have no readily available benchmark for valuing its shares.  But let's suppose that we were successful in identifying a publicly traded company (or, even better, several companies) similar to Amalgamated in most respects - both as to industry and as to size.  We'll call one of these firms Acme Corporation.  And let's suppose that Acme's P/E ratio is 8.  Let's also suppose that our crack researchers have discovered that another company, this one private, was recently acquired by a major office-furniture maker at roughly the same multiple 8.  This gives us confidence that our multiple of 8 is in the ballpark.  With this information, let's revisit Amalgamate's income statement presented in chapter 1 (table 1-2) to find its net income (earnings) of $347,000.

Plugging the relevant numbers into the following formula, we estimate Amalgamated's value:

Earnings x Appropriate Multiple = Equity Value

$347,500 x 8 = $2,780,000

Remember that this is the value of the company's equity.  To find the total "enterprise" value of Amalgamated, we must add int he total of its interest-bearing liabilities.  Table 1.1 shows that the company's interest-bearing liabilities (short term and long-term debt) for 2002 are $1,185,000.  Thus, the value of the entire enterprise is as follows:

Enterprise Value = Equity Value + Value of Interest-Bearing Debt

$3,965,000 = $2,780,000 + $1,185,000

The effectiveness of the multiple approach to valuation depends in part on the reliability of the earnings figure.  The most recent earnings might, for example, be unnaturally depressed by a onetime write-off of obsolete inventory, or pumped up by the sale of a subsidiary company.  for this reason, it is essential that you factor out random and nonrecurring items.  Likewise, you should review expenses to determine that they are normal - neither extraordinarily high nor extraordinarily low.  For example, inordinately low maintenance and repair charges over a period of time would pump up near-term earnings but result in extraordinary expenses int he future for deferred maintenance.  Similarly, nonrecurring, "windfall" sales can also distort the earnings picture.

In small, closely held companies, you need to pay particular attention to the salaries of the owner-managers and the members of their families.  If these salaries have been unreasonably high or low, an adjustment of earnings is required.  You should also assess the depreciation rates to determine their validity and, if necessary, to make appropriate adjustments to reported earnings.  And while you're at it, take a hard look at the taxes that have reduced bottom-line profits.  The amount of federal and state income taxes paid in the past may influence future earnings, because of carryover and carryback provisions in the tax laws.

Finance for Managers - Earnings-Based Valuation

Another approach to valuing a company is to capitalize its earnings.  This involves multiplying one or another income statement earnings figure by some multiple.  Some earnings-based methods are more sophisticated than others.  There is also the question of which earnings figure and which multiple to use.  

Valuing an asset using DCF and PER

Value investing is theoretically simple: buy assets for less than they're worth and sell when they approach or move beyond fair value. 


What 2 methods do you use to value assets?


1)  DCF


So too are valuing assets:discount future cash flows back to today at an appropriate interest rate for the life of the asset. The discounted cash flow (DCF) model is a commonly-used tool, hammered into every finance and business student.

But DCF models quickly deteriorate when they meet a rapidly changing world. The fact that most analysts failed to consider the impact of falling US house prices on their models played a major role in triggering the global financial crisis. Worse still, the misleading precision imbues investors with unwarranted overconfidence. Too often, models are precisely wrong.





2)  Price Earnings Ratio

Other tools are available to help you avoid this error. The price-to-earnings ratio (PER) is a regularly used proxy for stock valuation but also one of the most overused and abused metrics. To make use of it you need to know when to use it and when not to.

Related:

Price-Earning Ratio 101
http://myinvestingnotes.blogspot.com/2011/03/price-earning-ratio101.html

Introduction to Valuation - Videos

Valuation is the process of determining what something is worth. It is arguably the most important, and most difficult thing we do in finance.

This gives an introductory look at valuation from Discounted CashFlow Analysis (DCF) to market multiples (comparables).

Earnings multiplier of 2 equals 50% ROI.

What Is The Multiplier?

At times when I use the term “multiplier” or “multiple” as a business broker, many business owners screw up their faces and go “What?”. So I thought I might explain it here for your benefit.

The multiplier is the number of years it takes to recoup an investment in a business, based on the value of money today. For example, if I bought a business at $350,000 and EBIT (earnings before interest & tax) is $100,000 a year, then the multiplier for that business is the purchase price of the business divided by EBIT, which is 350K / 100K = 3.5x.

If we raise the profit to $150,000 a year, then the multiplier lowers to about 2.3x.

So a rule of thumb is – the smaller the multiplier, the more money it makes (and vice versa). But always keep in mind… if a business makes more money in a shorter amount of time, there’s probably a higher level of risk involved as well.

It’s Not All About Earnings!
However, the word “multiplier” need not only apply to earnings. It can also apply to sales, or to put another way, a business can be roughly appraised on its weekly or annual turnover. As an example, convenience stores are generally appraised on their weekly sales. So if a store does $15,000 a week, you might obtain a very rough indication of its value by multiplying it by 10 – the industry average in Queensland, Australia (as of October 2009). So an indicative price of the business might be $150,000.

So whenever you hear the word ‘multiplier’, you should clarify whether they’re talking about earnings or sales.

How About ROI or P/E?
You can also convert the earnings multiplier into a ROI (return on investment) figure by calculating 1 divided by the multiplier. So if you have an earnings multiplier of 2, 1 divided by 2 equals 50% ROI.

And also for all you share investors out there, the earnings multiplier is exactly the same as the P/E ratio (price earnings ratio).


http://www.businessforsaleblog.com.au/what-is-the-multiplier/

****Earnings Multiples by Aswath Damodaran

PE Ratio and Fundamentals

Proposition: Other things held equal, higher growth firms will have higher PE ratios than lower growth firms.

Proposition: Other things held equal, higher risk firms will have lower PE ratios than lower risk firms

Proposition: Other things held equal, firms with lower reinvestment needs will have higher PE ratios than firms with higher reinvestment rates.

Of course, other things are difficult to hold equal since high growth firms, tend to have risk and high reinvestment rates.


PEG Ratios and Fundamentals: Propositions

Proposition 1: High risk companies will trade at much lower PEG ratios than low risk companies with the same expected growth rate.

• Corollary 1: The company that looks most under valued on a PEG ratio basis in a sector may be the riskiest firm in the sector

Proposition 2: Companies that can attain growth more efficiently by investing less in better return projects will have higher PEG ratios than companies that grow at the same rate less efficiently.

• Corollary 2: Companies that look cheap on a PEG ratio basis may be companies with high reinvestment rates and poor project returns.

Proposition 3: Companies with very low or very high growth rates will tend to have higher PEG ratios than firms with average growth rates. This bias is worse for low growth stocks.

• Corollary 3: PEG ratios do not neutralize the growth effect.


Relative PE: Definition

The relative PE ratio of a firm is the ratio of the PE of the firm to the PE of the market.

Relative PE = PE of Firm / PE of Market

While the PE can be defined in terms of current earnings, trailing earnings or forward earnings, consistency requires that it be estimated using the same measure of earnings for both the firm and the market.

Relative PE ratios are usually compared over time. Thus, a firm or sector which has historically traded at half the market PE (Relative PE = 0.5) is considered over valued if it is trading at a relative PE of 0.7.

The average relative PE is always one.

The median relative PE is much lower, since PE ratios are skewed towards higher values. Thus, more companies trade at PE ratios less than the market PE and have relative PE ratios less than one.


Read: 103 slides on earnings multiples
http://pages.stern.nyu.edu/~adamodar/pdfiles/eqnotes/earnmult.pdf

Click here to read more:

https://myinvestingnotes.blogspot.com/2025/12/earnings-multiples-by-aswath-damodaran.html

Valuation Methodologies

Despite their widespread usage, only limited theory is available to guide the application of multiples. With a few exceptions, the finance and accounting literature contain inadequate support on how or why certain multiples or comparable firms should be chosen in specific contexts. Compared to the DCF and RIV approach, standard textbooks on valuation devote little space to discussing the multiples valuation method.


Valuation Methodologies

This note provides an overview of the wide range of methodologies employed by Davy analysts when valuing shares.

One approach used is to apply average valuation multiples derived over multi-year periods, primarily with a view to smoothing cyclical effects.

Share-based multiples include:

Historic and forward price/earnings (P/E) ratios, based on normalised earnings before goodwill amortisation
Historic and forward price/cash-earnings (pre-depreciation) ratios
Price to net asset value per share
Dividend yields


Enterprise-based valuation multiples include:

Historic and forward earnings before depreciation, interest, tax, depreciation or amortisation (EBITDA) ratios; EBITDAR ratios are used where rental/lease charges (R) are material
Historic and forward EBITA ratios
Historic and forward operating cash-flow ratios
Enterprise value (EV)/sales ratios
EV/invested capital ratios
As enterprise values include net financial liabilities and minority interests, these are then deducted to arrive at the residual equity value.

Cyclical considerations
In the case of average earnings multiples, cognisance is given to the stage of the relevant industry cycle, as it may not be appropriate to apply average multiples towards the peak or trough of a cycle. In such cases, earnings multiples prevailing at the corresponding stages of previous cycles may be used.

Asset-based valuations
In the case of asset-based valuations, reported net assets generally provide a floor to a company's valuation. In many cases, however, company accounts can understate the underlying economic value of a company's assets, and a ratio such as return on invested capital to weighted average cost of capital (ROIC/WACC) may provide a more appropriate indicator of the book value multiple.

Company comparisons
The ratings of similar companies may be taken into account in valuing shares, as indeed may average ratings for particular industry sectors. Such ratings are commonly used in analysts' sum-of-the-parts (SOTP) valuations.

Cash-flow based valuation
In discounted cash-flow (DCF) models a company's forecast future free cash-flows are discounted by its weighted WACC. Due to the uncertainties involved in forecasting long-term cash-flows, analysts use a number of different DCF models.

Other valuation techniques
In some instances, other valuation metrics may be used. For instance, enterprise value per tonne of installed capacity may be used in capital-intensive sectors or in the earlier stages of a company's development.

http://www.davy.ie/Generic?page=valuationmethodologies

Fair market valuation of a business

Fair market valuation of a business

Table of earnings multiples for groups of industries
(choose the earnings multiple for the industry closest to the one you are valuing)

Very narrow profit variation - 10 times average earnings
Cosmetics; Food; Tobacco; Utilities

Moderately narrow profit variation - 9 times average earnings
Amusement; Beverages; Chemical; Container; Drug; Meat Packing; Oil; Paper / Paper Products; Retail Trade; Sugar; Textile

Moderately wide profit variation - 7 times average earnings
Advertising; Agricultural Impt.; Aviation; Boots and Shoes; Coal; Electrical Equipment; Household Products; Financial; Leather; Office Equipment; Printing; Publishing; Radio; Railroad; Rubber; Shipping; Ship Building

Very wide profit variation - 6 times average earnings
Automobiles; Automobile Accessories; Construction; Machinery; Non-Ferrous Met.; R.R. Equipment; Steel



http://www.investordesktop.com/calcs/calcs/busins_fmvb_tbl.htm

Price to earnings ratio (P/E ratio) explained

Price to earnings ratio (P/E ratio) explained
by Kenneth W. McCarty

Price to earnings ratio (P/E ratio sometimes referred to as the multiple) is the current price per share divided by a years worth of earnings per share (EPS) for a particular stock. It is an important indicator of perceived value for a stock. Often it is used to compare two different stocks in the same sector (or two sectors in a given market) in an effort to find the better "deal". It sounds simple enough, but in practice it is a bit more complicated.

Not all publicly traded companies have earnings (they can have losses instead), yet these stocks clearly have value. P/E in such circumstance cannot be relied upon when it is negative or undefined. Much more important for estimating the current value of this type of equity are such things as cash on hand and other tangible assets. Some investors may anticipate that the stock will eventually have real earnings and add perceived value to the stock based on this assumption.

A backwards or "trailing" P/E takes into account only the earnings for the past year. In a "Bull Market", this form of P/E can be considered an indicator for the floor of a stock's share price. Instead of estimates, the earnings stated in the last 4 quarterly reports are publicly known and are generally not subject to change at a whim (except when future reports become current or the company is forced to make restatements by the SEC or an unfavorable audit).

Many investors prefer to use a forward P/E instead. This speculative potential of the stock's perceived worth that may or may not be added into the price anticipates and uses earnings over the next 12 months. Market forces determine how reliable such calculated predictions are and adjust prices accordingly. Company track records and economic influences are used by traders to judge the reliability of those numbers.

The difference between the two values that forward and backward P/E represent helps create volatility in the price of the stock as traders try to forecast earnings. Different stocks trade over different ranges of multiples for a variety of reasons. Many stocks in mature industries historically tend to trade between multiples of 10 and 20. Technology stocks that have real earnings often trade between multiples of 20 and 40. A company that has significant revenue growth may deserve a much higher multiple than this because the implication is that notable future earnings growth will continue to occur. When track records for 10Q quarterly reports are consistently positive, investors tend to follow the idea that solid companies under good management will continue to notify the market of future earnings growth. Investors like to trade on trends because "the trend is your friend".

When traders and investors on the market either become extremely pessimistic or optimistic, historical range standards for P/Es generally do not hold true over the short-term. During the height of the stock bubble of 1999 and 2000, too many stocks traded with ratios over 500! Such imbalances are eventually corrected and that is what happened. Knowing the historical standards gives us insight into why those stock prices eventually crashed so abruptly and steeply. The trend could no longer continue.

In contrast, currently there is a dramatic pessimism depressing prices in the stock market (since November of 2007). I've seen a number of technology stocks trade with a backward P/E of 10 or lower. Certainly in this financial environment a P/E of around 15 seems common for even a technology stock! Some might even consider the trend justified because of the implications inherent from a failing sub-prime loan market. Yet these P/E ratios are far below the historic average even in the worst of times.

Even more unusual is that some of those same stocks are experiencing record breaking increased earnings with projected significant earnings growth - despite the continued horrendous condition of the financial sector. Some of these stock's earnings performance over the last 6 to 9 months have even been better than the most optimistic expectations. Yet a few of these top performers have had their price cut nearly in half with little to no recovery! Clearly there are forces other than just P/E ratios and growth potential at work when the market determines the worth of a given stock at any given time. Part of my job as a trader is to ask why this is happening at this particular time and respond appropriately. Keep in mind that history tells us a significant correction to the upside is inevitable once investors recognize the "good deals" available.


http://www.helium.com/items/1082973-what-is-pe-ratio

WHAT DOES PE RATIO TELL YOU?

WHAT DOES IT TELL YOU?

The P/E ratio gives us an idea of how much the investors are willing to pay for the company's earnings. The higher the P/E, more the chances of good earnings in the future and the higher premium investors are ready to pay for that anticipated growth. A lower ratio on the other hand means just the opposite; that the market has ruled out the company.

But just because the ratio is very high or very low cannot help investors to make a decision. A high P/E can also be an overpriced stock. Also if one stock has double the P/E of another stock in the same industry, but with the same rate of earnings growth, it is not seen to be a wise investment as more money has to be shelled out. A low P/E ratio may be a market that was overlooked. The investors who discover the true worth of such stocks make big fortunes overnight.

There are various interpretations for the P/E value and this is just one of them:
*N/A: A company with no earnings has an undefined P/E ratio. Companies with losses or negative earnings also fall under this category.
*0-10: This means that the company's earnings are declining. It could also mean an overlooked stock.
*10-17: This is the average healthy value
*17-25: This means that the stock is either overvalued or its earnings are increasing.
*25+: Such companies are expected to have high future growth in earnings.


It is important that investors note avoid basing a decision on this measure alone. The ratio is dependent on share price which can fluctuate according to changes in the market.

http://www.helium.com/items/1059698-price-to-earnings-ratio-pe-ratio-explained