You found a stock at $50. Is that cheap or expensive? The price alone can’t say — $50 is a bargain for one company and a fortune for another. Valuation multiples turn price into something comparable by measuring it against the business behind it.
P/E — the workhorse
The price-to-earnings ratio divides the share price by earnings per share:
P/E = price ÷ EPS
A P/E of 20 means you pay $20 for each $1 of annual earnings. A high P/E says the market expects strong growth; a low one signals caution — or a bargain. P/E only works for profitable companies, and it varies hugely by industry and growth rate, so compare like with like.
When earnings don’t work
- Price-to-sales (P/S) — price ÷ revenue. Useful for fast-growing or unprofitable firms that have sales but no earnings yet.
- Price-to-book (P/B) — price ÷ the balance-sheet equity (“book value”). Handy for asset-heavy businesses like banks.
- EV/EBITDA — enterprise value over earnings before interest, tax, depreciation and amortisation. It accounts for debt, so it compares companies with different financing on a fairer footing.
”Cheap” is always relative
A multiple is never cheap or dear on its own — only versus something: the company’s own history, its competitors, or its growth rate. A P/E of 30 can be reasonable for a fast grower and reckless for a shrinking one. Our P/E valuation tool lets you play with this directly.
Case study: the dot-com P/E mania
At the height of the dot-com bubble in 1999–2000, multiples detached from reality. Investors, convinced the internet changed everything, paid extraordinary prices for revenue — or even for no revenue. Some leaders traded at P/E ratios of 100, 200, or more (and many hot startups had no earnings at all, so they had no P/E to speak of — people fell back to ever-flimsier metrics like “eyeballs”).
A P/E of 200 implies you’d wait 200 years of current earnings to be repaid — only justifiable by truly explosive, sustained growth. For most, that growth never came. When sentiment turned in 2000, those rich multiples collapsed: the Nasdaq fell roughly 78% from its peak, and many darlings went to zero.
The survivors are instructive too — a few (like Amazon) grew into their lofty multiples over decades. But you couldn’t tell winners from losers at a P/E of 200. The episode is the textbook reminder that a high multiple is a bet on a specific future, and paying any price for growth is how bubbles end.
The takeaway
Multiples — P/E, P/S, P/B, EV/EBITDA — are fast yardsticks for what you’re paying relative to earnings, sales, assets, or cash flow. They’re comparisons, not verdicts: always judge a multiple against peers, history, and growth. (This is education, not investment advice.)