What is Earning Multiplier?
Earning multiple or earnings multiple is the financial tool to measure a company’s stock price over the company’s earnings per share (PES). It helps the investor to measure how expensive the share price if compare with their return. It also tells how fast the investors will receive their investment back base on the earnings per share.
Earning Multiple also allow the use compare one company share to another company share to find the best performance. As we know, investors are going to invest in a higher return company rather than a slow one. It is one of the best measurements as it relies on the market price and historical return.
In simple words, it is the tool to estimate the time required to breakeven the investment by relying on the earnings per share. It is the time spend in order to collect the return to cover the initial investment. The shorter we spend to break even, the better it is. And it is also the tool to measure how expensive the stock is.
Earning Multiplier Formula
Earning Multiplier = Share Price / Earning Per Share
- Share price: is the current price of company share trading in the capital market.
- Earnings per Share: is the earning company made and divided by the number of shares outstanding.
Example of Earning Multiplier
ABC Co,…Ltd is listed on the stock exchange. The current price of its share is $ 100 per share and the earning per share is $ 20. Please calculate the earnings multiplier.
Earning Multiplier = Share price / Earning per Share = $ 100 / $ 20 = 5
It means that investors need to spend five years to recover the initial investment. So is it good or bad for company ABC? It is hard to judge the company’s performance by this ratio. We need to compare to the industry average, the shorter is the better.
Forward Earnings Multiplier
Forward Earning Multiplier is the forward estimation of future company’s earnings multiplier. Rather than using current earning, we estimate the future earnings per share. Then use expected EPS to calculate the forward earning multiplier. It will be more reliable to estimate future earnings rather than rely on past data. The past earnings may not reflect the future.
The result from our estimation may be over or under the actual result. It will depend on the management experience, knowledge, and available information. It is very hard to predict 100% accurate results.
Trailing Earnings Multiplier
Trailing Earning Multiplier is the ratio that depends on the past earnings per share of the company. It depends on the past performance which usually the last 12 months for calculation. It is more accurate as the earning is the actual performance in the past. However, the future result may be different which depends on many factors.