Market Multiple, also known as trading multiples, is used to compare two financial measures, to determine the value of a company. It is another name for Price to Earnings Ratio (also called P/E Ratio)
It is a determinant of whether a stock is priced appropriately when compared to its financial status and gives investors an opportunity to forecast a company’s stock price for better decision making.
Market Multiple, i.e., P/E Ratio= (Stock Price)/ (Earnings per Share)
For example, a company XYZ’s current stock price is Rs. 30.00 and current earnings per share of Rs. Rs. 7.50.
Then its P/E Ratio is 30/7.5= 4
P/E Ratio has no unit.
Using the market multiple approach, investors can determine whether stocks in their portfolios will increase or decrease in price through the next term. Investors may then buy or sell stocks in order to maximize their expected gains calculated.
Advantage of using Market Multiple Approach:
Market multiples analyses are easy to understand, apply and use because there is no need for projecting cash flows. Information is also easy to obtain from published reports of publicly traded companies like 10-K submissions or annual reports.
There are many other market multiple ratios that are used, viz. EV/EBIT, EV/EBITDA, EV/Sales, etc.