Valuation multiples: what a price is worth relative to profit

A share price on its own says little. A price of $200 can be cheap for one company and dear for another, depending on how much profit stands behind each share. A valuation multiple fixes that by dividing the price, or the value of the whole business, by a measure of what it earns, such as profit, cash flow or sales. A company priced at 20 times its earnings is worth $20 for every $1 of yearly profit, and that number can be set beside another company's, whatever their sizes.

Multiples are the quickest valuation tool, and they are everywhere: in company reports, brokers' notes, news and screening tools. A multiple is not a different method from the discounted cash flow valuation of the previous lesson. It is the same valuation with the forecast folded into a single number, and the useful question to ask of any multiple is what growth, risk and return it contains. This lesson calculates Apple's multiples, derives the multiple a business is worth, and sets out where a comparison can mislead.

Multiples fall into two families, and the rule that keeps them honest is that the top and the bottom must belong to the same people.

An equity multiple divides the value of the shares, the market value of equity, by something that belongs to the owners alone. Price to earnings divides it by net income, which is what is left after lenders have been paid. Price to book value divides it by equity on the balance sheet. Price to free cash flow divides it by the cash left for owners.

An enterprise multiple divides the value of the whole business, equity plus debt less cash, by something that belongs to lenders and owners together, measured before interest. Enterprise value to sales, to EBITDA, to operating income and to NOPAT all fit. EBITDA is operating income before depreciation and amortization, a rough stand-in for operating cash before reinvestment. Because enterprise multiples are before interest and use the value of the whole business, they do not change when a company swaps debt for equity, which makes them the better tool for comparing companies funded in different ways.

Mixing the families is the commonest error. Dividing enterprise value by net income, or the value of equity by operating income, compares a number that includes debt with one that does not.

For the market value of Apple's shares this lesson uses the figure on the cover of its annual report: $3,253,431 million held by people outside the company on 28 March 2025. Enterprise value adds debt of $98,657 million and takes off cash and marketable securities of $132,420 million, both at the fiscal year end on 27 September 2025, giving $3,219,668 million. The profit figures are for fiscal 2025.

Every multiple is a compressed valuation. Take the discounted cash flow value of a business that grows at a steady rate g for ever, with a cost of capital r and new investment earning a return R. The enterprise value is next year's free cash flow divided by (r − g), and free cash flow is after-tax operating profit times (1 − g ÷ R). Divide through by this year's profit and the result is a multiple built only from growth, risk and return:

A multiple rises with growth, rises with the return on new investment and falls with the cost of capital. The same logic gives the equity version: price to earnings is the share of earnings paid out, times (1 + g), over (the cost of equity − g), as Aswath Damodaran of New York University sets out in his notes on relative valuation. With Apple's total payout of 95% of net income, a cost of equity of 9%, which is an illustration, and 3% growth, that gives a price to earnings multiple of 16.3, against 29.0 in the market.

The relationships are not linear. Doubling growth does not double a multiple, and a one-point change in the cost of capital moves it much more when the rate is low than when it is high. That is why comparing companies without looking at what drives them can mislead.

Set the cost of capital, long-run growth, the return on new investment and the tax rate. The left page shows the share of profit that has to be reinvested to deliver the growth, and the earnings yield. The right page shows the enterprise value multiples that follow. Growth is for ever, so the figures describe a steady-state business, not one in the middle of a growth spurt.

A multiple is only as comparable as the profit in its denominator. Three adjustments come up again and again.

One-off items. Apple's net income for fiscal 2024 of $93,736 million included a one-time tax charge of $10,200 million. On that figure the price to earnings multiple is 34.7. Without the charge, it is 31.3, and on fiscal 2025 earnings it is 29.0. The one-off distorted the multiple by more than three turns.

Capital structure. Net income is after interest, so price to earnings falls as a company borrows more, because earnings are spread over fewer shares but are riskier. Enterprise multiples neutralise this, which is why they are the better choice for companies with different amounts of debt. A fair comparison also treats leases the same way for each company.

The point in the cycle. A cyclical company has high earnings at a peak, and a low multiple, and low earnings in a slump, and a high multiple. A multiple on one year's profit can be cheap when profit is about to fall. Averages over several years or a measure of normal profit help.

The usual use of multiples is to value one company by looking at others. The method takes four steps: choose a multiple that fits the business, look at its range across a group of similar companies, work out why companies differ, and apply a suitable multiple to the company. Damodaran's notes stress that the group should be companies with similar growth, risk and cash flow characteristics, not just the same industry, and that medians are usually safer than averages because the distributions are skewed.

The method answers a different question from a discounted cash flow. It says whether a company looks expensive or cheap against others, and says nothing about whether the whole group is priced sensibly. A company can be cheap against its peers when every one of them is dear. And two companies are never identical, so a difference in multiple always needs to be explained by a difference in growth, risk or returns before it counts as a difference in value.

A multiple divides a market value by a measure of the business. The table calculates four for Apple and Microsoft. The market values are the figures stated on the cover of each company's annual report for shares held by outsiders, as of 28 March 2025 for Apple and 31 December 2024 for Microsoft. They are not the same date and do not include shares held by insiders, so they are a close approximation to market value. The results are a demonstration of the method, not a current valuation, since prices move every day. Enterprise value adds borrowings and subtracts cash and investments.

Multiples are most dangerous when they are compared between countries without checking what sits in the numerator and denominator.

• Currency. The price and the earnings must be in the same currency. A company that lists in one country but reports in another's currency, or a depositary receipt that represents a different number of shares from the local share, can give a distorted ratio.
• Accounting standard. Under IFRS 16 all leases are on the balance sheet with depreciation and interest, so operating profit before depreciation is higher than at a US company with the same leases, where operating lease costs are deducted from operating profit. A multiple of enterprise value to operating profit before depreciation looks lower for the IFRS company, unless lease liabilities are included in its enterprise value.
• Fiscal year. Apple's year ends in September, Microsoft's in June and Toyota's in March, so the same calendar period is not covered by the same "last twelve months".
• Scope. A manufacturer with a finance arm, like Toyota, should not be compared with a pure manufacturer on a total enterprise value basis, since the arm's debt and receivables are inside the numbers.

A multiple is a shortcut for a valuation, and it is only as comparable as the accounting beneath it.