What is Valuation multiple?
Scaling price to a common measure lets you compare companies of different sizes; valuing a business from how similar ones are priced is called relative valuation. Equity multiples such as P/E use the share price or market capitalisation, while firm multiples such as EV/EBITDA use enterprise value. A multiple folds growth, risk, reinvestment and the discount rate into one number without showing which of them the price relies on, and comparing with peers inherits whatever mispricing the whole group has.
Also called multiple, valuation ratio, relative valuation, trading multiple
Multiple = price or value ÷ a per-unit measure. P/E = share price ÷ earnings per share; EV/EBITDA = enterprise value ÷ EBITDA
Same company, same year, two prices (J3 case, illustrative)
- EV ÷ Y3 EBITDA at the $18.00 price
- 10.4x
- EV ÷ Y3 EBITDA at the $13.14 DCF value
- 8.0x
- P/E at the $18.00 price
- 18.5x
- P/E at the $13.14 DCF value
- 13.5x
- What changed: only the price
- $18.00 → $13.14A multiple is the same valuation in a shorter form; it does not say which assumption the price needs.
A multiple is not a verdict
'30x earnings' is a comparison waiting for context: growth, risk and how much the business must reinvest. If the peer group is overpriced, looking cheap against it proves little.