Valuation Multiples: P/E, P/B, P/S, EV/EBITDA

Canonical data. Figures tie to Wexford Instruments and the Pillar 25 market-data extension — an illustrative price of $12.00, not a valuation.

It is the most-used tool in investing because it is fast, comparable, and requires no forecasting. It is also the most misused, because the thing it appears to avoid — forecasting — is not avoided at all. It is merely hidden.

Every multiple is a compressed valuation

This is the single most useful thing to understand here. A multiple is not an alternative to a discounted valuation; it is a discounted valuation with all its assumptions collapsed into one number. For a stable business, price-to-earnings can be written as payout ratio ÷ (cost of equity − growth rate) — so a P/E already contains a view about growth, about risk, and about how much of the earnings are distributed.

Which means a multiple can be reversed to reveal what it assumes, and that reversal is usually more informative than the multiple itself. Instead of asking whether 19× is expensive, ask what growth rate 19× requires — and then ask whether that is plausible. The worked example does exactly this.

Matching numerator to denominator

The most common technical error in valuation is pairing a numerator and denominator that do not describe the same claim. The rule is simple. Equity value goes with flows available to equity — market capitalisation or share price with earnings, book value, or dividends. Enterprise value goes with flows available to everyone — with EBITDA, EBIT, or sales, all of which are struck before interest and therefore belong to lenders and shareholders together.

So price-to-EBITDA is meaningless: it divides a number belonging to shareholders by a number belonging to shareholders and lenders. And this is why EV/EBITDA is more comparable across companies than P/E — it is neutral to how a business is financed, while P/E is not. Two identical businesses with different debt loads will show different P/E ratios and similar EV/EBITDA multiples.

Three traps

A low multiple is not the same as cheap. A low P/E can reflect expected decline, elevated risk, or earnings at a cyclical peak. A high one can reflect growth, or simply depressed current earnings. The multiple is the market's summary of a view; it is not a discount.

Cyclical businesses invert the intuition. Their P/E is lowest when earnings are at a peak and highest at the trough — because the denominator moves far more violently than the price. For a cyclical company, a low P/E is often a warning rather than an opportunity, which is the opposite of how it reads.

And the denominators inherit everything. Earnings depend on the accounting choices in Pillar 23; EBITDA excludes the capital spending a business needs, which Pillar 24 showed can be most of it; book value is a historical record rather than a value. A multiple is only as comparable as its denominator.