what is a multiple 
a multiple measures some aspect of a company s financial well being determined by dividing one metric by another metric investors use multiples to quantify a company s growth productivity and efficiency they use multiples to make comparisons among companies and find the best investment opportunities types of multiples include price to earnings p e and enterprise value ev to sales multiples formula and calculation of multiplesthe formula for calculating multiples is multiple performance metric a performance metric b begin aligned text multiple frac text performance metric a text performance metric b end aligned multiple performance metric b performance metric a to calculate the multiple divide the first metric by the second metric keep in mind that the metric in the numerator is typically larger than the one in the denominator understanding multiplesmetrics are quantitative tools that measure a company s performance these metrics are used by different people for various reasons for instance company executives use metrics to analyze corporate finance and operational strategies similarly analysts can use metrics to make opinions and investment recommendations while investment professionals use metrics to make important decisions about their investing portfolios metrics can be used together to measure a company s financial health and well being when grouped together these metrics are called multiples as noted above when one metric is divided by another it results in a multiple this figure can be used to make different determinations for instance investors and analysts generally rely on two major methods when they make stock valuations one is based on cash flow while the other is based on a multiple of some performance measure such as earnings or sales the multiples approach to valuation is a theory based on the concept that similar assets should sell for similar prices types of multiplesthe most common multiple used in the valuation of stocks is the p e multiple it is used to compare a company s market value price with its earnings a company with a price or market value that is high compared to its level of earnings has a high p e multiple a company with a low price compared to its level of earnings has a low p e multiple a p e of five times 5x means a company s stock is trading at a multiple of five times its earnings a p e of 10 times 10x means a company is trading at a multiple that is equal to 10 times earnings a company with a high p e is considered to be overvalued likewise a company with a low p e is considered to be undervalued ev is a popular performance metric used to calculate different types of multiples ev shows how much money would be needed to buy a specific company the ev of a company is calculated by taking the company s market capitalization adding total debt including long term and short term debt and subtracting all cash and cash equivalents many investors see ev as a better performance metric than relying on market capitalization alone because it offers a more complete picture of a company s valuation a widely used multiple is the ev to earnings before interest taxes depreciation and amortization ebitda multiple also referred to as ev ebitda this multiple helps investors compare companies in the same industry or sector before making an investment decision many equity analysts consider ev ebitda to be a solid measure of cash flow available to a firm the ev to earnings before interest and taxes ebit multiple also referred to as ev ebit is similar to the p e multiple but is preferred by some analysts for its ability to give a more complete picture of a company s financial performance and actual worth the multiple is useful for pinpointing companies that might be undervalued or overvalued it s best used for less capital intensive companies with fewer depreciation and amortization expenses the ev to sales or the ev sales sales multiple compares a company s enterprise value to its annual sales this multiple is considered an important valuation tool because it takes into account a company s equity and debt while giving investors a quantifiable metric of how to value a company based on sales it s also useful in evaluating companies with negative earnings to be most effective investors should compare the ev sales multiple of the company they are analyzing to that of other companies in the same industry example of a multiplea multiple can be used to show how much investors are willing to pay per dollar of earnings as computed by the p e ratio let s assume that you are analyzing a stock with 2 of earnings per share eps which is trading at 20 this stock has a p e of 10 this means investors are willing to pay a multiple of 10 times the current eps for the stock 