What does it mean to value a company "by a multiple"?
You already know from the Foundations course that a $500 share price tells you nothing about size or value on its own. A multiple is how the market fixes that. It divides what you pay by what you get — price by a unit of business — so that two very different companies can finally be compared on the same scale.
Price per unit of business
A multiple is just a ratio: a market value on top, a business fundamental on the bottom.
- P/E — price per dollar of earnings (profit).
- P/S — price per dollar of sales (revenue).
- P/B — price per dollar of book value (net assets on the balance sheet).
Say a company trades at a P/E of 20. Read it out loud as a sentence: "the market is paying 20 dollars of price for every 1 dollar this company earns in a year." That single sentence is the whole idea of relative valuation. You are no longer looking at a price tag; you are looking at a price relative to something the business produces.
Why "relative"
A multiple on its own is a number floating in space. It only becomes information when you compare it — to other companies in the same industry, to the same company's own history, or to the wider market. That is why this whole method is called relative valuation: the multiple answers "cheap or expensive compared to what?", never "cheap or expensive" in absolute terms.
Twenty is not high or low until you know that its industry averages 14, or that the same company traded at 30 a year ago. The rest of this course is about making those comparisons honestly.
An observation, not a verdict
Notice the careful language. A low multiple is an observation — "this trades below its peers." It is not a conclusion that the stock is a bargain, and it is certainly not a signal to buy. A whole unit later is devoted to why cheap-looking multiples are sometimes cheap for a very good reason.
Try it now
The multiples EODHD publishes for one large company, dated:
- Read the trailing P/E. Say it as a sentence out loud: "the market pays ___ dollars of price for 1 dollar of this company's annual earnings."
- Do the same for price-to-sales and price-to-book. Three multiples, three different units of business on the bottom — and three completely different-looking numbers for one company on one day.
- Now a second company, and deliberately not a peer:
Compare the two trailing P/E figures. You have just done your first relative-valuation comparison — and, because a bank and a consumer-electronics maker are not comparables, your first meaningless one. Unit 3 is about fixing that. 4. Run it on a company of your own. The Terminal shows the same published multiples for any listed company; this link opens one, and the symbol can be changed to yours: Open MSFT.US — fundamentals in the EODHD Terminal. Say its trailing P/E as the same sentence you used in step 1.
A note on what we do here. EODHD Academy teaches how markets work. Nothing here is a recommendation to buy or sell anything. Multiples are tools for observation and comparison, and every ticker is an illustration, not a pick.