Brief Definition
Multiples are a financial measurement used to evaluate a company’s value by comparing it to similar companies. Investors use multiples to assess if a stock is overvalued or undervalued compared to its peers.
Further Explanation
Multiples are a financial measurement used to evaluate a company’s value by comparing it to similar companies. They are ratios derived from dividing one financial metric by another, such as price-to-earnings (P/E) ratio or enterprise value-to-EBITDA (EV/EBITDA). Investors use multiples to assess if a stock is overvalued or undervalued compared to its peers.
Example:
If Company A has a P/E ratio of 15 and Company B in the same industry has a P/E ratio of 20, Company A might be considered undervalued. This means for every dollar of earnings, investors are willing to pay $15 for Company A and $20 for Company B.