when investors calculate the valuation of a company and its stock price they re essentially comparing how much earnings are generated as a result of another financial metric within the company 
for example one might want to know how much earnings are generated as a result of outstanding shares of stock which is called earnings per share eps remember stock and debt issuance are used by companies to raise funds to invest in the business investors want to know how effectively the management team is using those funds to generate earnings the price to earnings p e ratio is the most common way to calculate the value of a stock it is equal to the company s share price divided by its earnings per share eps what s the valuation of the firm is not the same question as what is the value of the firm the market valuation would be a multiple of the current trading price to earnings per share eps such as the stock price to book value per share or another price multiple using price multiples allows for valuation comparisons across peer groups an investor cannot make sense that the value of firm a is 4 billion and firm b is 9 billion to make a more informed investment decision the investor is better off knowing that the valuation of firm a is 15x eps and firm b is 18x eps 