Multiple

A multiple is a relative measuring instrument or measuring criteria that is used to measure the value of stock.

How Multiple Works

In order to understand the concept of the multiple let’s take the following example:-

Assume that the stocks a well known shopping store is trading at $14 currently in the market. The earnings per share issued by the store over its shares is $2 per share. The price to earnings ratio that is PE can be calculated as under:-

Price to Earnings Ratio = 14/ 2 = 7

Now this number 7 is known as the multiple for the value of the stocks of that well known shopping store.

Let’s assume that the price to earnings ratio of the other stores in the industry is 10. By using the average industry multiple with the earnings per share you can estimate the price at which the store should trade in order to get high profit and high earnings per share. This means that price should be calculated by using the following formula:-

Price = EPS x Multiple

Price = 2x 10

Price = $20

This means that the price of the shares of the big store must be equal to 20 rather than 14 as the value of the shares of the big store is 20.

Importance of Multiple

Multiple can be used to find the value of a number of performance measures of the company. The most common performance measures that can be calculated with the help of multiple include EPS, EBITDA,

Revenue and the Book Value of the company. Investors use multiples to gain some insight into whether a company’s stock price is too high or too

low. Multiples are quick, but limited tools for stock analysis. They can provide a snapshot of a stock’s potential without getting bogged down in the details of the financial statements.

 

 

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