The term price multiple refers to a ratio that compares the share price with some sort of monetary flow or value to allow evaluation of the relative worth of a company’s stock. Some practitioners use price ratios as a screening mechanism. If the ratio falls below a specified value, the shares are identified as candidates for purchase, and if the ratio exceeds a specified value, the shares are identified as candidates for sale. Many practitioners use ratios when examining a group or sector of stocks and consider the shares for which the ratio is relatively low to be attractively valued securities.
Price multiples that are used by security analysts include the following:
- Price-to-earnings ratio (P/E)
- Price-to-book ratio (P/B)
- Price-to-sales ratio (P/S)
- Price-to-cash-flow ratio (P/CF)
Relationships among Price Multiples, Present Value Models, and Fundamentals
