what is the earnings multiplier 
the earnings multiplier is a financial metric that frames a company s current stock price in terms of the company s earnings per share eps of stock that s simply computed as price per share earnings per share also known as the price to earnings p e ratio the earnings multiplier can be used as a simplified valuation tool with which to compare the relative costliness of the stocks of similar companies it can likewise help investors judge current stock prices against their historical prices on an earnings relative basis understanding earnings multiplierthe earnings multiplier can be a useful tool for determining how expensive the current price of a stock is relative to the company s earnings per share of that stock this is an important relationship because the price of a stock is theoretically supposed to be a function of the anticipated future value of the issuing company and future cash flows resulting from ownership of that stock if the price of a stock is historically expensive relative to the company s earnings it may indicate that it s not an optimal time to purchase this equity because it s overly expensive furthermore comparing earnings multipliers across similar companies can help illustrate how expensive various companies stock prices are relative to one other example of the earnings multiplieras an example of a practical application of the earnings multiplier consider fictitious company abc let s assume this corporation has a current stock price of 50 per share and earnings per share eps of 5 under this set of circumstances the earnings multiplier would be 50 dollars 5 dollars per year 10 years this means it would take 10 years to make back the stock price of 50 given the current eps the multiplier can also be verbally expressed by saying company abc is trading at 10 times earnings because the current price of 50 is 10x the 5 eps if 10 years ago company abc had a market price of 50 and eps of 7 the multiplier would have been 7 14 years the earnings multiplier should only be used to value investments on a relative basis and shouldn t be used to gauge an absolute valuation of a stock the current price would be more expensive relative to current earnings than the price 10 years ago because at that time the stock was only trading at 7 14 times earnings instead of 10 times earnings it trades at currently comparing company abc s earnings multiplier to other similar companies can also provide a simple gauge for judging how expensive a stock is relative to its earnings if company xyz also has an eps of 5 but its current stock price is 65 it has an earnings multiplier of 13 years consequently this stock may be deemed to be relatively more expensive than the stock of company abc which has a multiplier of only 10 years 