How to Calculate Multiples on Stocks

by C. Taylor

Multiples reflect a stock's price with respect to some other variable, such as earnings, equity or revenue. The most common multiple is the price-earnings or P/E ratio, which is based on a company's announced earnings, but this multiple is only useful when a stock has positive earnings. The price-equity ratio is a useful alternative for describing price in terms of company assets. Because this multiple relies on equity, however, it fails to properly assess companies with unquantifiable equity, such as pharmaceutical patents and firms with negative equity. The price-sales ratio assesses price with respect to revenue and it can be used even if a company generate losses.

1. Look up the current price of the stock and the company’s earnings, book value of equity or revenue per share. This information is available through your investment broker and from financial websites such as CNN Money, Yahoo Finance and Google Finance. If you can only obtain a total figure for earnings, equity or sales, divide it by the number of outstanding shares to calculate the per-share figure.

2. Divide the stock price by the earnings per share to calculate the P/E ratio. As an example, a stock priced at $60 with $3 in earnings per share has a P/E ratio of 20.

3. Divide the stock price by the market value of equity to calculate the price-equity ratio; this multiple is also called the price-book ratio. For example, a $60 stock with $5 in equity per share has a price-equity ratio of 12.

4. Divide the stock price by the revenues per share to calculate the price-sales ratio. A $60 stock with $30 in revenue per share has a price-sales ratio of 2.

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