Stock Valuation Ratios
Evaluate equity prices using Price-to-Earnings, Price-to-Sales, EV-to-EBITDA, and Price-to-Book relative valuation metrics.
TL;DR
- Calculate
price-to-earningsmultiples to evaluate trailing equity valuation. - Use
EV-to-EBITDAto normalize capital structure debt differences. - Compare multiples against historical averages and direct
industry-peers.
Price To Earnings Variations
Trailing P/E MultipleStock price divided by trailing twelve months (TTM) GAAP earnings.
Set trailing p/e multiple to current price divided by eps ttm.Forward P/E MultipleStock price divided by consensus forecasted earnings per share.
Set forward p/e multiple to current price divided by forecasted eps.Shiller CAPE RatioCyclically adjusted P/E using 10-year inflation-adjusted earnings.
Set shiller cape ratio to real price divided by avg real eps10yr.Enterprise Value Multiples
Enterprise Value (EV)Theoretical takeover cost: Market cap plus total debt minus cash.
Set enterprise value (ev) to market cap plus total debt minus cash reserves.EV to EBITDACapital structure neutral multiple measuring operational cash.
Set ev to ebitda to ev divided by ebitda.EV to Free Cash FlowFirm value relative to literal cash generated after capex.
Set ev to free cash flow to ev divided by free cash flow.Revenue And Asset Multiples
Price to Sales (P/S)Valuation metric utilized for early-stage unprofitable firms.
Set price to sales (p/s) to market cap divided by total revenue.Price to Book (P/B)Market price relative to net accounting asset value.
Set price to book (p/b) to market cap divided by shareholder equity.Price to Tangible BookExcludes goodwill and intangible assets from book equity.
Excludes goodwill and intangible assets from book equity.Comparative Valuation Discipline
Peer Group BenchmarkingBenchmarking against 5 to 10 direct operational competitors.
Benchmarking against 5 to 10 direct operational competitors.Historical Multiple RangeEvaluating current multiple against 10-year historic average.
Check whether current pe is less than avg pe10yr times 0.85.PEG NormalizationNormalizing P/E against long-term earnings growth rate.
Normalizing P/E against long-term earnings growth rate.Tips
- Always evaluate valuation multiples relative to direct
industry-peersrather than generic broad stock market averages. - Use the
EV-to-EBITDAratio when comparing companies with significantly different debt levels on balance sheets.
Warnings
- Beware of cyclical companies showing artificially low
PE-multiplesat peak commodity or economic cycle profits. - Do not rely solely on
price-to-salesmultiples for companies that have never proven positive net margins.
In Practice
Calculate Enterprise Value, EV/EBITDA multiple, and implied equity value relative to peers.
An investor evaluates Enterprise Value to EBITDA for a company with a $1,000M market cap, $200M debt, $50M cash, and $150M EBITDA.
- 1. Calculate Enterprise Value (EV): $1,000M market cap + $200M debt - $50M cash = $1,150 million.
- 2. Calculate EV/EBITDA multiple: $1,150M EV / $150M EBITDA = 7.67x.
- 3. Compare with industry peer average EV/EBITDA multiple of 11.5x.
- 4. Calculate implied enterprise value at peer multiple: $150M * 11.5 = $1,725 million.
- 5. Subtract net debt ($150M) to find implied equity: $1,725M - $150M = $1,575 million ($1,575M vs $1,000M).
Company trades at 7.67x EV/EBITDA, representing a 33% discount to peers.
EV/EBITDA accounts for corporate debt structure, providing a capital-neutral relative valuation multiple.
FAQ
Trailing P/E uses actual reported net earnings over the past 12 months, while forward P/E divides current price by consensus analyst earnings estimates for the upcoming four quarters.
Enterprise Value to EBITDA is capital structure neutral. It accounts for cash and debt balances and excludes non-cash depreciation policies, allowing cleaner comparisons between firms.
A high P/B ratio generally indicates that the company creates immense economic value from intangible assets, brand loyalty, or intellectual property not fully captured on physical balance sheets.