Valuation Multiples

P/E, EV/EBITDA, PEG, Price-to-Sales — different multiples exist because no single ratio works for every kind of company. Knowing which one to reach for matters as much as the number itself.

Price-to-earnings (P/E)

The most familiar multiple divides a stock's price by its earnings per share, showing how much investors are paying for each dollar of profit. It's simple and widely used, but it breaks down for companies with no profit at all — a young, fast-growing company that's still unprofitable has no meaningful P/E — and it can be distorted by one-time accounting items, debt levels, and tax rates that vary company to company.

EV/EBITDA

Enterprise value to EBITDA (earnings before interest, taxes, depreciation, and amortization) is generally considered a cleaner comparison across companies with different capital structures. Enterprise value accounts for a company's debt and cash, not just its stock price, and EBITDA strips out financing and accounting choices that vary firm to firm. This makes EV/EBITDA a favorite in industries with heavy debt loads or capital spending — utilities, telecoms, industrials — where P/E comparisons alone can be misleading.

The PEG ratio

The PEG ratio takes P/E a step further by dividing it by the company's expected earnings growth rate, producing a rough sense of whether a high P/E is justified by fast growth. A stock with a P/E of 40 might look expensive in isolation, but if it's growing earnings 40% a year, its PEG ratio of roughly 1 suggests the price may be reasonable relative to that growth. It's a useful sanity check, though it leans heavily on growth estimates, which carry their own uncertainty.

Price-to-Sales (P/S)

Price-to-Sales divides market value by revenue rather than profit, which makes it useful for companies that aren't yet profitable — early-stage growth companies, for instance — where P/E simply doesn't apply. Its weakness is the flip side of its strength: because it ignores costs and profitability entirely, two companies with identical P/S ratios can have very different margins and very different quality of business underneath the same top-line number.

Matching the tool to the company

No single multiple works everywhere. P/E suits stable, profitable businesses; EV/EBITDA suits capital-intensive or heavily indebted ones; PEG adds growth context to an otherwise static P/E; and P/S fills the gap for companies without earnings yet. Experienced investors rarely rely on one multiple alone — they cross-check a few, alongside qualitative context like margins and competitive position, before drawing conclusions about whether a stock looks cheap or expensive.