Company financials
Valuation multiples explained
A factual guide to P/E, EV/EBITDA, and P/S — what each ratio compares, why capital structure matters, and why a multiple is never cheap or expensive on its own.
What a multiple compares
A valuation multiple divides a measure of value by a measure of earnings or sales. Price-to-earnings (P/E) divides share price by earnings per share. Enterprise value to EBITDA (EV/EBITDA) divides enterprise value — market cap plus debt minus cash — by earnings before interest, taxes, depreciation, and amortization. Price-to-sales (P/S) divides market cap by revenue.
Each answers a slightly different question. P/E reflects what equity holders pay per dollar of net profit; EV/EBITDA is closer to capital-structure neutral and is useful when companies carry different debt levels; P/S can be used when a company is not yet profitable.
Why the same number means different things
Multiples are built from filings (10-K, 10-Q) and market data. Trailing multiples use the last twelve months; forward multiples use analyst estimates, which are uncertain and frequently revised. Aerarium Research presents the underlying figures with their source so the inputs stay visible.
A given P/E means different things in different industries and growth stages. Faster-growing or higher-quality businesses often trade at higher multiples, and that is an expectation about the future, not a mispricing.
What not to infer
A low multiple is not automatically cheap, and a high multiple is not automatically expensive. A low P/E can reflect a declining business; a high P/E can reflect growth expectations or optimism. Multiples need growth, profitability, and industry context to interpret.
Differences between similar companies usually have reasons — growth, leverage, earnings quality, or accounting. Multiples are screening context, not a buy-or-sell conclusion.
Common questions
Why use EV/EBITDA instead of P/E?
EV/EBITDA includes debt and cash, so it compares companies with different capital structures more evenly. P/E only reflects equity value and net income.
Can I use price-to-sales for unprofitable companies?
Yes, because it only needs revenue. But it says nothing about whether or when a company will become profitable, so it is a starting point, not a conclusion.
Does a low multiple mean a stock is cheap?
Not on its own. A low multiple can reflect real problems, and a high one can reflect growth. Multiples are context that require growth, quality, and industry comparison.