Chapter 8 · Day 8 — Valuation ratios
The multiples, and what they miss
Every multiple is a shorthand for a full valuation. Knowing what each one assumes is what stops it being used wrongly.
8 of 30 · 14 min
A multiple compares price to something fundamental. It is fast, and it is only meaningful against the same company's history, its peers, or its sector. A P/E quoted with no comparison is a number, not a conclusion.
| Ratio | Formula | Best for | Blind to |
|---|---|---|---|
| P/E | Price ÷ EPS | Profitable, stable firms | Debt; loss-makers; one-offs |
| P/B | Price ÷ BVPS | Banks, insurers, investment cos | Asset-light businesses |
| P/S | Market cap ÷ Revenue | Loss-making or cyclical firms | Whether sales are profitable |
| EV/EBITDA | Enterprise value ÷ EBITDA | Comparing across capital structures | Capital intensity |
| PEG | P/E ÷ Earnings growth % | Growth firms | Growth estimates are guesses |
| Dividend yield | DPS ÷ Price × 100 | Income | Whether the dividend lasts |
| Earnings yield | EPS ÷ Price × 100 | Comparing against deposit rates | Same limits as P/E |
Enterprise value
EV = Market capitalisation + Total debt − Cash. It is the cost of buying the whole business, debt included. Two companies on the same P/E can have very different EV/EBITDA if one is heavily borrowed — which is precisely why EV multiples exist.
Worked — Illustrative Example
| Input | Value |
|---|---|
| Market price | Rs 184.00 |
| EPS | Rs 11.50 |
| BVPS | Rs 92.00 |
| Shares | 90,00,000 |
| Total debt | Rs 42,000k |
| Cash | Rs 9,000k |
| EBITDA | Rs 22,800k |
| DPS | Rs 6.00 |
- P/E = 184 ÷ 11.50 = 16.0×
- P/B = 184 ÷ 92 = 2.0×
- Market cap = 184 × 90,00,000 = Rs 1,65,600k
- EV = 1,65,600 + 42,000 − 9,000 = Rs 1,98,600k
- EV/EBITDA = 1,98,600 ÷ 22,800 = 8.7×
- Dividend yield = 6 ÷ 184 × 100 = 3.3%
- Earnings yield = 11.50 ÷ 184 × 100 = 6.3%
Saved in this browser only — there is no account to create. Clearing your browser data clears your progress.