A high share price does not mean “expensive”, nor a low one “cheap”. To judge, you relate the price to the fundamentals: that is what valuation multiples are for.
The P/E: the king of multiples
The P/E (price/earnings) relates the share price to earnings per share. A P/E of 20 means you are paying 20 years of current earnings. A high P/E reflects strong growth expectations; a low one is either a bargain or a problem.
The PEG: the P/E set against growth
Is a P/E of 30 excessive? Not if the company is growing 30% a year. The PEG divides the P/E by the growth rate: close to 1, the valuation is consistent with the growth.
EV/EBITDA: beyond the capital structure
It relates enterprise value (market capitalisation plus net debt) to EBITDA. The advantage: it neutralises the effect of debt and taxation, which makes comparisons between companies easier.
Always compare like with like
A multiple only means something against a reference: the stock's own history, its competitors, or its sector. A P/E of 15 is expensive for a bank and cheap for a software publisher.
In Earnnest
The Valuation tab computes a non-personalised fair value using the multiples method (median multiple × EPS): a factual benchmark, identical for everyone.
À retenir
- ✓Price alone says nothing; a multiple relates price to fundamentals.
- ✓P/E for raw valuation, PEG for growth, EV/EBITDA for comparison.
- ✓A multiple is always read in relative terms: history, peers, sector.