Earnings Multiplier

What is the Earnings Multiplier?

This one is a financial metric that helps to frame the current stock price of a company in terms of the Earnings Per Share of stock for the company. This is easily evaluated as Earnings or price per share.

Earnings multiplier is also known as the Price-to-Earnings (P/E) ratio as it can also be used in the form of a basic valuation tool that compares the costliness of the similar companies’ stocks. Likewise, earnings multiplier also helps investors assess the prices of current stock against the historical prices on the Basis of earnings-relative.

Explaining Earnings Multiplier

The earnings multiplier could be quite useful when it comes to comprehending the expensiveness of the stock’s current price in comparison to the earnings per share of the same stock of the company. This is an essential relationship as the stock's price is, supposedly, meant to be an aspect of the expected future value of the issuing company along with the future cash flows resulted from the stock’s ownership.

If the historic price of the stock is high as compared to the earnings of the company, it may refer to the time not being precise for the equity’s purchase as it could be over-expensive. Moreover, comparing earnings multipliers with similar companies can help find out how high several stock prices could be as relatively to each other.

Earnings Multiplier Example

Let’s take an earnings multiplier example here. Suppose there is a company named XYZ and it has a current stock price of Rs. 50 per share and Rs. 5 as earnings per share. Under this situation, the earnings multiplier would be Rs. 50/5 per year = 10 years.

This simply means that it will take 10 years to make back the price of the stock of Rs. 50, given the current earnings per share. Now, comparing the XYZ’s earnings multiplier to other similar organizations can also help with an effective assessment for evaluating how expensive the stock is in comparison to its earnings.

So, if another company, ABC, has earnings per share of Rs. 5; however, its current stock price is Rs. 65, it will have an earnings multiplier of 13 years. Therefore, this stock will be deemed to be relatively expensive than the stock of XYZ company, which has 10 years of the multiplier.