JUL · ISSUE 30 · July 23, 2026
CONCEPTMultiples: cheap or expensive in one number
A bare price says nothing. 200 can be a bargain or a rip-off. The multiple puts it in context.
THEY MEASURE
PRICE
against a metric
USED TO
COMPARE
very different firms
RULE
CONTEXT
price alone misleads
THE IDEA
PRICE ÷ METRIC
that's the formula behind every multiple
A multiple divides a company's price by something it produces: earnings, sales, book value. That turns a bare price into a measure you can compare across very different businesses.
TO GET IT
EXAMPLE20×
20×
20 years of earnings for today's price
That's why a high multiple isn't bad on its own: you pay more because you expect earnings to grow. The question is always: will they grow enough?
A P/E of 20 means you pay 20 times annual earnings. If nothing changed, it would take 20 years to earn back what you paid from those profits alone.
- P/E
- — Price over earnings per share. The most famous multiple in the world.
- PAYBACK YEARS
- — How many years of current earnings cover the price you pay today.
SIMPLE RULE
KEY IDEAA multiple is a question, not an answer
“Comparing price to what a company produces doesn't give you the answer. It gives you the right question: is paying this justified?”
A high multiple doesn't say 'sell' and a low one doesn't say 'buy'. It says what the market expects, and your job is to judge if it's right.
- EXPECTATION
- — What the market already assumes will happen. It's baked into the price.
- JUSTIFIED
- — When future growth makes today's price reasonable.
SEE IT
THE MECHANICSWhat you pay for each dollar of earnings
The same dollar of earnings costs twice as much at 40× as at 20×. Buying expensive only makes sense if earnings will grow fast.
The higher the multiple, the dearer each dollar the company earns. The line rises because you pay more years of earnings for the same thing.
- HIGH MULTIPLE
- — You pay many years of earnings. A strong bet that they will grow.
- HISTORICAL AVERAGE
- — The level a multiple tends to hover around over decades.
THE BIG THREE
THE LANGUAGEThe three multiples the professionals speak
P/E
Price over earnings. The most used and the quickest. Its flaw: it ignores debt and distorts when earnings are erratic.
EV/EBITDA
Total value (debt included) over operating profit. Pros prefer it because it compares firms with different debt levels without tricks.
PRICE / BOOK VALUE
Price against what net assets would be worth if the firm shut down. Very useful for banks and asset-heavy businesses.
None is best: each looks at the firm from a different angle. Pros use several at once so they don't fool themselves.
- EBITDA
- — Earnings before interest, taxes and depreciation. It gauges the cash the business generates.
- BOOK VALUE
- — Assets minus debts, per the accounts. What would in theory be left.
WHERE IT COMES FROM
$1 OF SALESWhy 'earnings' is only one slice
Of every dollar sold, only a part reaches earnings. That's why pros never look at P/E alone: they cross-check several multiples.
The multiple leans on earnings, but earnings are the last slice of every dollar that comes in. Seeing it this way keeps you from trusting a single figure.
- NET MARGIN
- — How much profit is left from each dollar of sales after paying everything.
- REINVESTMENT
- — The money a firm puts back into the business to grow in the future.
TO APPLY IT
5 BASKETSFive baskets that show cheap and expensive
| IVE | value | → - | S&P value: firms with low multiples. The 'cheap' side of the market. |
| SPYG | growth | → - | S&P growth: high multiples because you pay for future growth. |
| QUAL | quality | → - | Quality factor: good margins and low debt. A high multiple is often better justified. |
| MOAT | moat | → - | Firms with a competitive edge. An example of why expensive sometimes pays off. |
| IWD | value | → - | Large-cap value: another window onto the same cheap style. |
Five representative ETFs that split styles by multiple. No day prices: this is a timeless concept, not a recommendation.
- VALUE
- — A style that seeks firms with low multiples relative to their real worth.
- GROWTH
- — A style that pays high multiples betting on future growth.
- MOAT
- — The competitive edge that protects a company's profits from rivals.
WRAP
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- MULTIPLE
- — Price divided by a business metric. The language for comparing.
- P/E
- — Price over earnings. The most cited multiple; always read it alongside another.