Business

Valuation Basics

P/E, P/S and what a multiple really means.

A P/E ratio of 20 means investors pay $20 for every $1 of annual earnings — roughly a 5% earnings yield if nothing changes.

High multiples aren't automatically expensive: they price in growth. A 40x company growing 30% a year can be cheaper than a 12x company shrinking.

Always compare multiples within an industry and against the company's own history, and sanity-check them with free cash flow.