FinanceLesson 1 of 2 in the course Stocks and Stock Valuation

Stock Valuation Multiples: P/E, P/B, Equity and Enterprise Value

5 flashcards · 5 quiz questions · 5 match pairs · 5 fill-in sentences · English

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Summary

The price-to-earnings ratio is one of the most widely used tools for assessing a company’s common stock. This lesson explains how to calculate the P/E ratio, distinguish trailing and forward P/E, and interpret the ratio through comparisons.

P/E=Price per ShareEarnings per ShareP/E = \frac{\text{Price per Share}}{\text{Earnings per Share}}

The ratio indicates how much investors are willing to pay for each dollar of a company’s earnings. It is commonly expressed as a multiple, such as 6×6\times.

All flashcards

Book value
A balance-sheet measure of net assets, calculated as total assets minus total liabilities.
Forward P/E
A price-to-earnings ratio calculated using projected future earnings per share.
P/CF
A price-to-cash-flow ratio that relates share price to operating cash flow per share.
Enterprise value (EV)
A measure intended to represent the value of a business as a whole.
Precedent transaction analysis
Analysis of valuation multiples from relevant past transactions.

Quiz questions

  1. Which earnings figure is used to calculate a forward P/E ratio?Answer: Projected future earnings per share.
  2. A company’s share price is $36 and its book value per share is $24. What is its P/B ratio?Answer: 1.5×1.5\times
  3. Why can the P/S ratio be useful when a company reports negative earnings?Answer: The company may still have revenue that can be compared with its share price.
  4. Why should EV/EBITDA not be treated as a direct measure of cash flow?Answer: EBITDA does not account for every cash need of the business.
  5. What comparison can EV/EBITDAR help make more directly?Answer: Businesses with substantial rental or lease expenses.

Based on Principles of Finance by Julie Dahlquist, Rainford Knight (OpenStax), licensed CC BY 4.0. Adapted into a summary, flashcards and quizzes.

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