← Business Metric: Financial (all topics)
Valuation multiples (EV/EBITDA, P/E, P/B)
What it is
Enterprise value to EBITDA, price to earnings and price to book value - the standard shorthands for what a business is worth relative to what it earns or owns
They are comparisons rather than valuations, and they carry every assumption embedded in the companies compared
Impact on industries
- Fast, comparable and widely understood, which makes them the practical starting point for any valuation discussion
- Enterprise value multiples are comparable across capital structures, unlike price to earnings which is distorted by leverage
- They embed the market's assumptions about the comparison set, so a whole sector can be mispriced and every multiple still look reasonable
- Price to book is meaningless where assets are intangible, and price to earnings is meaningless where earnings are near zero or negative
- A multiple is a conclusion, not an analysis - the useful question is always what growth and return it implies