Business, Legal & Accounting Glossary
The most common measure of how expensive a stock is. The earnings multiple is equal to a stock’s market capitalization divided by its after-tax earnings over a 12-month period, usually the trailing period but occasionally the current or forward period. The value is the same whether the calculation is done for the whole company or on a per-share basis. The higher the earnings multiple, the more the market is willing to pay for each dollar of annual earnings. The last year’s earnings multiple would be actual, while the current year and forward year earnings multiple would estimates, but in each case, the “P” in the equation is the current price.
Companies that are not currently profitable (that is, ones that have negative earnings) don’t have an earnings multiple at all. also called price/earnings ratio (P/E ratio).
The earnings multiple of a stock, also called the price/earnings (P/E) ratio, is the share price divided by the earnings per share. The earnings multiple is often based on the prior twelve months of earnings data. However, the earnings multiple can also be based on the estimated future earnings. A $40 stock with $2 in annual earnings, for example, has an earnings multiple of 20. Unprofitable companies have no earnings or negative earnings cannot be valued based on an earnings multiple.
The higher the earnings multiple, the more investors are willing to pay for future growth. Using the earnings multiple and estimates of future earnings, investors can project a future value for a stock.
When large numbers of stocks see their earnings multiples decline, the market is said to be undergoing multiple compression. Conversely, when the average earnings multiple increases, the market is undergoing multiple expansion. Changes in the earnings multiple of an individual stock are often evaluated in the context of earnings multiples of the general market.
You should try and figure out how an earnings multiple may be able to make even money for your investment.
In the summer of that year, the earnings multiple grew as the company became more and more prosperous and its stock price soared.
At the meeting with my stockbroker this afternoon; we analyzed my past year’s investments earnings multiple, the stock’s market capitalization after dividing by it’s after-tax earnings, and decided on the same investments as the market still pays well their earnings.
To help you cite our definitions in your bibliography, here is the proper citation layout for the three major formatting styles, with all of the relevant information filled in.
Definitions for Earnings Multiple are sourced/syndicated and enhanced from:
This glossary post was last updated: 30th October, 2021 | 0 Views.