How to use P/E, EV/EBITDA, and other valuation multiples to assess whether a stock is cheap or expensive.
Educational content only — not personalized financial, legal, or tax advice.
Valuation multiples compare a company's market value to a financial metric (earnings, revenue, cash flow). They provide a quick way to assess whether a stock is cheap or expensive relative to its peers or its own history.
P/E (Price-to-Earnings): Share price divided by earnings per share. A P/E of 20 means investors pay $20 for every $1 of annual earnings. The S&P 500 average is roughly 20-25x; growth companies often trade at 40-100x.
EV/EBITDA: Enterprise value divided by earnings before interest, taxes, depreciation, and amortization. Less affected by capital structure than P/E — better for comparing companies with different debt levels.
P/S (Price-to-Sales): Market cap divided by revenue. Used for unprofitable growth companies. High P/S ratios (20x+) imply expectations of massive future profitability.
P/B (Price-to-Book): Share price divided by book value per share. Used for banks and asset-heavy businesses. A P/B below 1 suggests the market values the company below its accounting net worth.
Multiples function as comparative indicators rather than absolute measures. A P/E of 30 represents premium pricing for a utility but modest valuation for a high-growth enterprise software firm. Standard comparative practice requires benchmarking against:
Multiples produce distortions when applied to cyclical businesses where earnings peak at economic tops, artificially depressing P/E ratios. Investors combine multiples with discounted cash flow (DCF) models and analyses of underlying profit margins.
The S&P 500 Growth Index historically trades at a trailing P/E near 31.5x, reflecting premium pricing for rapid revenue growth. The S&P 500 Value Index trades at roughly 17.2x earnings, reflecting mature cash-generative businesses with stable dividend yields.
SaaS enterprise software companies trade primarily on EV/Revenue multiples averaging 10x–20x. Money-center banks like JPMorgan Chase trade on Price-to-Book (averaging 1.6x–1.8x P/B), while commercial real estate investment trusts rely on Price-to-Funds From Operations (P/FFO), historically averaging 15x–18x FFO. Detailed valuation frameworks are detailed in Tesla's stock valuation) and Tesla's valuation).