Earnings Multiple

Categories: Stocks, Strategies, Fundamental Analysis,

The most common measure of how expensive a stock is. The earnings multiple is equal to a stock's market capitalization divided by its after-tax earnings over a 12-month period, usually the trailing period but occasionally the current or forward period. The value is the same whether the calculation is done for the whole company or on a per-share basis. The higher the earnings multiple, the more the market is willing to pay for each dollar of annual earnings. The last year's earnings multiple would be actual, while current year and forward year earnings multiple would be estimates, but in each case, the "P" in the equation is the current price. Companies that are not currently profitable (that is, ones which have negative earnings) don't have a earnings multiple at all. also called price/earnings ratio (p/e ratio).