In the world of investments and finance, comparing equity multiples can provide clues about the real value of a company's stock and/or assets. For instance, one of the most popular multiples is the price-to-earnings ratio (P/E). The P/E ratio looks at the price of equity as a multiple of earnings. Higher multiples are assumed to be overvalued, whereas lower multiplies are assumed to be undervalued.
Determine the current market value of the stock. Request a quote from your broker or look it up on your favorite investment research site. Let's say the stock value is $10.
Determine the earnings per share (EPS) for the stock on the most recent earnings announcement. EPS can be found on the company's income statement or in the most recent press release. This can usually be found on the company website under Investor Relations.
Divide the price of the stock by the EPS. Let's say the EPS is .30. The P/E multiple is $10/.3 or 33.33x. That is, the price of the stock is trading at a multiple of 33.33x earnings per share.
Interpret the meaning of the answer. Compare against other P/E multiples in the same industry. If the average P/E multiple is 20x, then 33.33x is indicative of a stock which is overpriced. However, if the average multiple is 40x, it is indicative that the stock is undervalued in the market.
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