Market-Based Valuation: Price and Enterprise Value Multiples: formula sheet

Key formulas

Price multiple

Price multiple = Market price per share ÷ Fundamental per share

Fundamental can be EPS, book value, sales or cash flow per share. The same ratio works with total equity value over total fundamental.

Enterprise value

EV = Market value of equity + Market value of debt + Preferred stock − Cash and short-term investments

Subtract cash because it can pay down debt. Use market values where given; book debt is a common approximation.

EV/EBITDA

EV/EBITDA = EV ÷ EBITDA

Both numerator and denominator relate to all capital providers, so leverage differences matter less.

Dividend yield

Dividend yield = Dividends per share ÷ Price per share

Price is in the denominator, so this is the inverse of a typical price multiple. A lower yield means a higher price for the same dividend.

Implied value from a multiple

Equity value per share = Benchmark multiple × Company fundamental per share

For EV multiples: EV = multiple × EBITDA, then subtract debt and preferred, add cash, divide by shares.

Trailing P/E

Trailing P/E = Price ÷ EPS over last four quarters

Uses reported EPS. Price is current market price.

Forward (leading) P/E

Forward P/E = Price ÷ Expected EPS (next year)

Uses forecast EPS, so it carries forecast error.

Normalized EPS: historical average

Normalized EPS = average EPS over a full business cycle

Simple but ignores changes in company size.

Normalized EPS: average ROE

Normalized EPS = average ROE over cycle × current book value per share

Reflects the current capital base.

Justified forward P/E

Justified P/E1 = (D1 ÷ E1) ÷ (r − g) = payout ratio ÷ (r − g)

Needs r > g. Based on the Gordon growth model.

Justified trailing P/E

Justified P/E0 = [(D0 ÷ E0) × (1 + g)] ÷ (r − g)

Equals forward justified P/E × (1 + g).

PEG ratio

PEG = P/E ÷ (expected earnings growth rate in %)

Lower PEG suggests cheaper per unit of growth, other things equal.

Price from P/E

Value = Justified P/E × EPS (matching trailing or forward)

Match the P/E type to the EPS type.

P/B ratio

P/B = Market price per share ÷ Book value per share

Use the same per-share basis for both parts. Market price is the current share price.

Book value per share

BVPS = (Total equity − Preferred stock − Non-controlling interest) ÷ Common shares outstanding

Exclude treasury shares from the share count. Subtract non-controlling interest when total equity includes it, as it usually does under IFRS. Use the date the question gives.

Justified P/B

Justified P/B = (ROE − g) ÷ (r − g)

Valid for a constant sustainable growth rate with g < r. Compare with the actual P/B to judge relative value.

Price from justified P/B

Justified value per share = Justified P/B × BVPS

Equals the residual income single-stage value when ROE and g are constant and book value grows at g.

Tangible book value per share

Tangible BVPS = (Common equity − Intangible assets including goodwill) ÷ Common shares outstanding

Use when intangibles are not reliable measures of value.

Price to sales

P/S = Market price per share ÷ Sales per share = Market cap ÷ Total sales

Use the same period (trailing or forward) for all comparables.

Price to cash flow

P/CF = Market price per share ÷ Cash flow per share

State which cash flow: CF, CFO, EBITDA or FCFE. Do not mix variants.

Simple cash flow

CF = Net income + Depreciation + Amortization (+ other non-cash charges)

Ignores working capital changes and non-cash revenue.

FCFE

FCFE = CFO − Fixed capital investment + Net borrowing

Cash available to common shareholders after reinvestment and debt flows.

Justified P/S from the Gordon growth model

Trailing: P0/S0 = (E0/S0) × Payout × (1 + g) ÷ (r − g) Leading: P0/S1 = (E1/S1) × Payout ÷ (r − g)

E0/S0 is the trailing profit margin and E1/S1 is the forward profit margin. Match the margin to the sales period in the denominator. Payout is the dividend payout ratio = 1 − retention rate. Requires r > g.

Implied value from a multiple

Value per share = Benchmark multiple × Subject's sales (or cash flow) per share

Benchmark can be peer median, sector or the firm's own history.

Enterprise value

EV = Market value of common equity + Market value of preferred stock + Market value of debt + Non-controlling interest − Cash and short-term investments

Some texts also subtract non-operating assets such as investments in associates when their income is not in EBITDA. Follow the vignette's wording.

EV/EBITDA multiple

EV/EBITDA = EV ÷ EBITDA

Use the same EBITDA basis (trailing or forward) for the subject firm and the comparables.

Equity value from EV

Equity value = EV − Debt − Preferred stock − Non-controlling interest + Cash and short-term investments

This is the reverse of the EV formula. Divide by shares outstanding for value per share.

Other EV multiples

EV/EBIT = EV ÷ EBIT; EV/Sales = EV ÷ Sales; EV/FCFF = EV ÷ FCFF

All use an operating measure that is before payments to debt holders.

Value from a peer multiple

Estimated EV = Peer EV/EBITDA × Subject EBITDA

Then bridge to equity value and divide by shares.

Trailing dividend yield

Trailing yield = D0 ÷ P0

D0 is dividends over the previous four quarters. P0 is the current price.

Forward dividend yield

Forward yield = D1 ÷ P0

D1 is expected dividends over the next 12 months. Equals D0 × (1 + g) when dividends grow at g.

Yield, payout and P/E

D ÷ P = (D ÷ E) ÷ (P ÷ E) = payout ratio ÷ P/E

Use the same period for D, E and P/E (trailing with trailing, forward with forward).

Dividend payout ratio

Payout = D ÷ E = 1 − retention rate

Retention rate b = 1 − payout.

Gordon growth value

P0 = D1 ÷ (r − g), for r > g

Requires constant growth forever and r greater than g.

Yield under Gordon growth

D1 ÷ P0 = r − g, so r = D1 ÷ P0 + g

Implied required return is forward yield plus growth.

Total return

Total return = dividend yield + capital gain yield

Capital gain yield = (P1 − P0) ÷ P0.

Implied value from a benchmark multiple

Implied price = Benchmark P/E × Subject EPS

Use the same logic for P/B (× book value per share) or P/S (× sales per share). Use the same earnings basis (trailing or forward) as the benchmark.

Implied value using EV multiple

Implied EV = Benchmark EV/EBITDA × Subject EBITDA; Equity value = Implied EV − Net debt (− other claims such as preferred and non-controlling interest)

Divide equity value by shares outstanding for a per-share value.

Relative multiple

Relative P/E = Subject P/E ÷ Benchmark P/E

Above 1 means a premium to the benchmark; below 1 means a discount.

Harmonic mean of multiples

Harmonic mean = n ÷ Σ(1 ÷ multiple)

Equals the reciprocal of the average earnings yield. It is lower than the arithmetic mean when multiples differ.

Cross-sectional regression for a multiple

Predicted multiple = b0 + b1 × (Growth) + b2 × (Risk) + b3 × (Payout) + ...

Plug in the target company's values. Compare the predicted multiple with the actual multiple.

Valuation signal

Actual multiple < Predicted multiple → looks undervalued; Actual > Predicted → looks overvalued

Holds only if the model is reliable and the inputs are comparable.

Unexpected earnings (UE)

UE = Actual EPS − Expected EPS

Expected EPS may come from analyst consensus or a time-series model.

Standardized unexpected earnings (SUE)

SUE = (Actual EPS − Expected EPS) ÷ Standard deviation of unexpected earnings

The standard deviation is taken over a stated historical period of surprises. Scaled surprises allow comparison across firms.

Earnings surprise (percentage)

Surprise % = (Actual EPS − Consensus EPS) ÷ |Consensus EPS|

Use the absolute value of consensus when it is negative or small.

Relative strength

Relative strength = Stock price ÷ Benchmark (or index) value

A rising ratio over time means the stock is outperforming. Can also be a stock's return over a period minus the benchmark return.

Quick revision

• A multiple is a market value divided by a fundamental, and the benchmark must be built on the same definition.
• P/E = price ÷ earnings per share, and trailing uses past earnings while forward uses expected earnings.
• Normalise earnings for cyclical or one-off effects before using P/E.
• P/B = price ÷ book value per share, and it suits asset-heavy firms such as banks when book value is reliable.
• P/S is usable when earnings are negative, but it ignores margin differences.
• P/CF is harder to manipulate than earnings, but define cash flow the same way across firms.
• Enterprise value = market value of equity + debt + preferred stock + non-controlling interest − cash and short-term investments.
• EV/EBITDA suits firms with different leverage, and it works when earnings are negative.
• Dividend yield = dividends per share ÷ price, and it only tells the full story with payout and growth.
• In a comparables valuation, check that peers share business, growth, risk and accounting before applying their multiple.
• In a cross-sectional regression, a stock priced above the predicted multiple looks relatively overvalued.
• Momentum indicators use price or earnings trends, and they complement rather than replace fundamental multiples.

Common mistakes

• Dividing EV by net income or price by EBITDA Fix: Equity value pairs with equity earnings; EV pairs with EBITDA or EBIT. Say the pairing out loud before dividing.
• Forgetting to subtract cash when computing EV Fix: Write EV = equity + debt + preferred − cash every time, then fill in each term from the vignette.
• Applying a forward P/E to trailing EPS (or the reverse). Fix: Label each EPS as E0 or E1 before using it, and pair forward with E1 only.
• Forgetting the (1 + g) factor for the trailing justified P/E. Fix: Remember trailing = forward × (1 + g), because D0 is grown into D1.
• Leaving preferred stock in the equity used for BVPS Fix: Subtract preferred stock first. BVPS is for common shareholders only.
• Using shares issued instead of shares outstanding Fix: Deduct treasury shares to get shares outstanding before dividing.
• Using total market cap with per share sales (or the reverse). Fix: Put both numerator and denominator on the same basis before dividing.
• Saying P/S is useful because it shows profitability. Fix: Remember P/S ignores costs. Two firms with equal sales can have very different margins.
• Dividing EV by net income or EPS, or dividing price by EBITDA. Fix: Pair numerator and denominator by claimant. EV goes with pre-interest metrics. Price and market cap go with post-interest metrics.
• Adding cash to EV instead of subtracting it. Fix: EV is the cost of the operating business. Cash offsets the claims, so subtract it. In the reverse bridge, add cash.

Exam tips

• Always write the EV build-up on your scratch sheet. Examiners often hide cash or preferred stock in an exhibit footnote.
• When a question asks which multiple is most suitable, link the firm's feature (negative earnings, high leverage, asset-heavy, stable dividends) to the multiple's rationale.
• Read for traps: units in millions versus thousands, and per-share versus total figures.
• Interpretation questions usually reward the answer that says the multiple gap may be justified by growth or risk, not the one that declares mispricing outright.
• With no penalty for wrong answers, answer every question, but do the matching check first because it removes many options quickly.
• Check whether the vignette asks for trailing or forward before touching the formula; it is the most common trap.
• Read the exhibit footnotes for one-off gains, losses and share count changes that change EPS.
• Use the average ROE method when book value is given; use the historical average when only an EPS series is given.