Equity Value Multiple
IntermediateAn equity value multiple is a valuation ratio that compares the value of a company's shares with a financial measure that belongs to shareholders, such as earnings, book value or cash flow per share.
Equity value multiples use market capitalization, or share price, in the numerator. The denominator must match: it should be a measure that relates only to shareholders, after interest has been paid to lenders.
Common examples include the price-to-earnings ratio, which compares price with earnings per share; the price-to-book ratio, which compares price with book value per share; the price-to-sales ratio; and price-to-cash-flow ratios.
For example, a company with a share price of 60 and earnings per share of 4 has a price-to-earnings multiple of 15. If similar companies trade at 18 times earnings, the company may look relatively cheap, assuming its prospects are similar.
Equity value multiples are easy to calculate and widely quoted. However, they are affected by how a company is financed. A company with more debt pays more interest, which lowers its earnings and can distort comparisons. For this reason, analysts comparing companies with different debt levels often prefer enterprise value multiples, such as EV/EBITDA.
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