======Multiple======
A multiple (also known as a 'valuation multiple' or 'trading multiple') is a financial ratio that investors use to value a company. Think of it as a quick and easy shorthand to gauge a company's worth by comparing one financial metric to another. For example, when you buy a house, you might compare its price to its square footage to see if you're getting a good deal relative to other houses in the neighborhood. In the same way, an investment multiple compares a company's price (like its [[Share Price]] or its total [[Enterprise Value]]) to a key business metric (like its earnings, sales, or book value). The most famous of these is the [[Price-to-Earnings Ratio]] (P/E), which tells you how much you're paying for every dollar of a company's profit. These ratios are the bedrock of //relative valuation//, allowing investors to compare a company's price tag against its peers, its own history, or the broader market, helping to quickly spot what might be cheap or expensive.
===== Why Do Multiples Matter to a Value Investor? =====
For a [[Value Investing|value investor]], the goal is simple: buy businesses for significantly less than their [[Intrinsic Value]]. Multiples are one of the most powerful first-glance tools for this treasure hunt. A low multiple can be a bright neon sign pointing toward a potentially undervalued company, flagging it for a deeper investigation. Conversely, an eye-wateringly high multiple can serve as a warning of speculative fever or a "story stock" whose price has become dangerously detached from its underlying business reality.
The legendary value investor [[Benjamin Graham]] warned against overpaying, no matter how wonderful the company. Multiples provide the initial, crucial context for "price." They help you frame the question: "Am I paying a sensible price for this business's performance?" By grounding your analysis in these simple ratios, you can avoid getting swept up in market hype and stay focused on finding genuine bargains. They are the starting point, not the destination, of a thorough [[Valuation]].
===== The Most Common Multiples You'll Encounter =====
Multiples come in several flavors, each telling a slightly different story. They generally fall into two main categories: those based on the stock price and those based on the company's total enterprise value.
==== Price-Based Multiples ====
These are the most common multiples you'll see quoted in the financial press. They compare the company's stock price to a "per share" metric.
=== The Classic: Price-to-Earnings (P/E) Ratio ===
  * **Formula:** Market Price per Share / [[Earnings Per Share]] (EPS)
  * **What It Tells You:** This is the celebrity of multiples. A P/E of 15x means you are paying $15 for every $1 of the company's current annual earnings. It's a straightforward way to see how the market values a company's profitability.
  * **Best For:** Stable, profitable, mature companies where earnings are a reliable indicator of performance.
=== The Sales Story: Price-to-Sales (P/S) Ratio ===
  * **Formula:** Market Price per Share / Revenue per Share
  * **What It Tells You:** The P/S ratio shows how much you're paying for every dollar of a company's sales.
  * **Best For:** Companies that aren't yet profitable (like high-growth tech or biotech firms) or for businesses in [[Cyclical Industry|cyclical industries]] (like auto manufacturing) where earnings can swing wildly, but sales are more stable.
=== The Bookworm: Price-to-Book (P/B) Ratio ===
  * **Formula:** Market Price per Share / [[Book Value]] per Share
  * **What It Tells You:** This compares the company's stock market value to its net asset value as recorded on its [[Balance Sheet]]. A P/B below 1.0x suggests you could theoretically buy the company for less than its stated net worth.
  * **Best For:** Asset-heavy businesses like banks, insurance companies, and industrial firms. It was a classic metric for deep value investors looking for "cigar-butt" stocks.
==== Enterprise Value Multiples ====
These multiples are often preferred by professional analysts because they give a more complete picture of a company's total value, as if you were buying the whole company outright—debt included. [[Enterprise Value]] (EV) is calculated as [[Market Capitalization]] + Total Debt - Cash.
=== The Professional's Choice: EV/EBITDA ===
  * **Formula:** Enterprise Value / [[EBITDA]]
  * **What It Tells You:** This ratio compares the total value of the company to its earnings before interest, taxes, depreciation, and amortization.
  * **Best For:** Comparing companies with different levels of debt (capital structure) and tax rates. Because it strips out non-cash expenses like depreciation and the effects of financing, it's considered a "cleaner" metric for comparing the core operating profitability of different businesses, especially across borders.
===== A Word of Warning: The Pitfalls of Multiples =====
Relying on multiples without critical thinking is a classic rookie mistake. They are a fantastic starting point, but a terrible finishing line. Always be aware of their limitations.
  * **It's Relative, Not Absolute:** A company might have a low multiple compared to its peers, but what if the entire industry is in a bubble? Being the "cheapest house on an overpriced street" doesn't automatically make it a bargain.
  * **Garbage In, Garbage Out:** The numbers in a multiple are only as good as the accounting behind them. The "E" in P/E can be massaged by clever accountants. Always scrutinize the quality of the earnings or sales figures you are using.
  * **Context is King:** A low multiple isn't always a buy signal. It could be a //value trap//—a dying business with fundamental problems that fully justify its cheap price. Likewise, a high multiple might be warranted for a company with a phenomenal [[Growth Rate]] and a powerful [[Economic Moat]].
  * **One Size Doesn't Fit All:** You can't meaningfully compare the P/E of a slow-growing utility company with that of a fast-growing software company. Always compare apples to apples: companies in the same industry with similar business models and growth prospects.
===== The Capipedia Bottom Line =====
Think of multiples as a financial thermometer. They give you a quick reading on whether a stock's price is hot, cold, or just right relative to its peers and its own history. They are an indispensable tool for screening for ideas and framing your analysis.
However, a thermometer can't diagnose the illness. For that, you need to be a doctor—to dig into the company’s annual reports, understand its business model, assess its management, and confirm its competitive standing. A multiple tells you the **price** of the stock; a deep business analysis tells you its **value**. The secret to successful [[Value Investing]] is buying when there is a beautiful, gaping chasm between the two.