CFA Level I Exam · Relative Value Equity Valuation Approaches

Price Multiples: P/E, P/B, P/S and P/CF Explained

Updated 7 October 2026 · Fact-checked

A price multiple divides a share price (or market value) by a fundamental such as earnings, book value, sales or cash flow per share. You value a stock by applying a benchmark multiple to the company's fundamental, then comparing the result with the market price. Choose the multiple that suits the company.

Understand Price Multiples: P/E, P/B, P/S and P/CF

A price multiple scales a stock's price by a fundamental value per share. It lets you compare companies of different sizes. The four main ones are P/E (price to earnings), P/B (price to book value), P/S (price to sales) and P/CF (price to cash flow).

You use them in the method of comparables: compare a stock's multiple with a benchmark, such as peers, its own history or the market. A lower multiple than the benchmark suggests cheap, if fundamentals are similar. Fundamentals are never fully identical, so ask why the multiple differs.

P/E is the most popular because earnings drive value. A trailing P/E uses past 12 months of EPS. A forward (leading) P/E uses expected EPS for the next period. The justified P/E comes from the Gordon growth model: leading P/E = payout ratio ÷ (r − g), and trailing P/E = payout × (1 + g) ÷ (r − g). A higher growth rate or lower required return raises the P/E. P/E fails when EPS is negative or near zero, is volatile, or is distorted by accounting choices.

P/B suits financial firms and asset-heavy companies, since book value is a sensible anchor there. It is weaker for firms with large intangibles, or where book value is distorted by buybacks, inflation or accounting differences. P/S works when earnings are negative, because sales are rarely negative and are harder to manipulate. But sales ignore profitability and cost control.

P/CF uses operating cash flow (CFO), free cash flow to equity (FCFE), or an adjusted cash flow such as net income plus non-cash charges. Cash flow is harder to manipulate than earnings and is more stable. Its weakness: simple CF (net income + depreciation and amortization) ignores working capital changes and non-cash revenue items, so it can mislead. EBITDA is not a P/CF measure. It is the denominator of the EV/EBITDA multiple, which is an enterprise value multiple.

Key formulas to remember

P/E: P/E = Price per share ÷ EPS; Trailing uses past 12 months EPS; forward uses expected EPS.
Justified leading P/E: P0/E1 = (1 − b) ÷ (r − g) = payout ÷ (r − g); b is retention ratio. Requires r > g.
Justified trailing P/E: P0/E0 = payout × (1 + g) ÷ (r − g); Equals leading P/E × (1 + g).
P/B: P/B = Price per share ÷ Book value per share; Book value per share = (common equity − preferred equity) ÷ shares outstanding.
Justified P/B: P/B = (ROE − g) ÷ (r − g); Above 1 when ROE exceeds required return r.
P/S: P/S = Price per share ÷ Sales per share; Equivalent to market cap ÷ total sales.
Justified trailing P/S: P0/S0 = (E0/S0) × payout × (1 + g) ÷ (r − g); E0/S0 is the current (trailing) net profit margin. This is the trailing form, paired with current sales S0.
Justified leading P/S: P0/S1 = (E1/S1) × payout ÷ (r − g); E1/S1 is the expected net profit margin. This is the leading form, paired with expected sales S1, and has no (1 + g) factor.
P/CF: P/CF = Price per share ÷ Cash flow per share; Cash flow may be CFO, FCFE or adjusted CF (net income plus non-cash charges); state which. EBITDA belongs in EV/EBITDA, not P/CF.
PEG: PEG = P/E ÷ earnings growth rate (in percent); Lower suggests cheaper per unit of growth.

How to solve Price Multiples: P/E, P/B, P/S and P/CF questions

Use this approach for any question on price multiples.

1Identify the multiple asked about and whether it is trailing or forward.
2Check the fundamental: is it per share, and is it the right period (E0 or E1)?
3If a justified multiple is needed, pick the matching formula and confirm r > g.
4Convert percentages to decimals, then compute payout = 1 − retention.
5Calculate, then reasonableness-check: higher g or lower r must raise the multiple.
6For interpretation questions, link the multiple's strengths and weaknesses to the company's situation (negative earnings, financials, cyclical, etc.).
7Eliminate options that reverse the direction of a driver or use the wrong fundamental.

Quickest way: Justified P/E in three moves

When to use it: Use when given payout (or retention), r and g and asked for a P/E or implied price.

Find payout = 1 − retention.
Leading P/E = payout ÷ (r − g). Multiply by (1 + g) for trailing.
Price = P/E × matching EPS (E1 for leading, E0 for trailing). Scan the three options: smallest to largest helps you spot a wildly wrong magnitude.

Common mistakes in Price Multiples: P/E, P/B, P/S and P/CF

Using trailing and leading P/E formulas interchangeably.
Both look alike and differ only by (1 + g).
Fix: Leading pairs with E1 and has no (1 + g). Trailing pairs with E0 and includes (1 + g).
Using retention ratio in place of payout.
Questions often give retention, and the formula needs payout.
Fix: Always compute 1 − retention first and write it down.
Treating a low P/E as automatically cheap.
Multiples feel like a bargain signal.
Fix: A low P/E may reflect higher risk or lower growth. Compare only with similar fundamentals.
Using P/B for companies with large intangible assets or heavy buybacks.
P/B is taught as simple and stable.
Fix: P/B is most useful for financials and asset-heavy firms. Intangibles and accounting differences weaken it.
Claiming P/S works because sales show profitability.
Sales are hard to manipulate, so they seem reliable.
Fix: Sales ignore costs. P/S is useful when earnings are negative, but high sales can coexist with poor margins.
Defining P/CF with net income plus depreciation as full cash flow.
It is the common shortcut.
Fix: Remember it ignores working capital changes and non-cash revenue. CFO or FCFE is a better measure. Do not use EBITDA in P/CF; it belongs in EV/EBITDA.

Worked examples

Example 1

A company has a dividend payout ratio of 40%, a required return of 10% and a constant growth rate of 6%. Current EPS is 5.00 EUR. Which is closest to the justified price per share using the trailing P/E? (A) 33.3 EUR (B) 50.0 EUR (C) 53.0 EUR

Show the solution

Payout = 0.40; r − g = 0.10 − 0.06 = 0.04.
Leading P/E = 0.40 ÷ 0.04 = 10.0.
Trailing P/E = 10.0 × 1.06 = 10.6.
Price = trailing P/E × E0 = 10.6 × 5.00 = 53.00 EUR.
Check: option B (50.0) is the leading P/E of 10.0 applied to current EPS, which leaves out the (1 + g) factor. Option A (33.3) comes from dividing payout by g instead of r − g: 0.40 ÷ 0.06 = 6.67, and 6.67 × 5.00 = 33.3.

Answer: C. The justified trailing P/E is 10.6, which implies a price of 53.00 EUR.

Example 2

A firm has ROE of 14%, required return of 10% and growth of 6%. Which statement about its justified P/B is correct? (A) It equals 2.0 (B) It equals 0.5 (C) It equals 1.0

Show the solution

Justified P/B = (ROE − g) ÷ (r − g).
Numerator = 0.14 − 0.06 = 0.08.
Denominator = 0.10 − 0.06 = 0.04.
P/B = 0.08 ÷ 0.04 = 2.0.
Sense check: ROE exceeds r, so P/B must be above 1.

Answer: A. The justified P/B is 2.0.

Exam tips

Read whether the question gives E0 or E1 before choosing the formula.
Memorise the pairing of each multiple with the situations where it fails: P/E with negative earnings, P/B with intangibles, P/S with weak margins, P/CF with working capital changes.
Direction questions are common: higher g or lower r raises P/E and P/B.
Many items are conceptual. Match the multiple's weakness to the company described.
With no penalty for wrong answers, always answer; eliminate the option with the wrong direction first.

Practice questions from Relative Value Equity Valuation Approaches

Price Multiples: P/E, P/B, P/S and P/CF in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

CFA Level IIPrice and Enterprise Value Multiples Overview

Price Multiples: P/E, P/B, P/S and P/CF: frequently asked questions

What is the difference between trailing and forward P/E?

Trailing P/E divides the current price by earnings per share over the past 12 months. Forward P/E divides it by expected EPS for the next period. Forward P/E depends on forecasts, so it is less certain but more forward-looking.

How do I calculate the justified P/E ratio?

Compute the payout ratio as 1 minus retention. The leading justified P/E is payout ÷ (r − g). The trailing version multiplies that by (1 + g). The required return must exceed the growth rate.

What are the advantages and disadvantages of P/B?

Book value is usually positive even when earnings are negative, and it is more stable than EPS. It suits banks and asset-heavy firms. It is weak for firms with large intangibles, and accounting differences and buybacks can distort it.

Why use price to cash flow instead of P/E?

Cash flow is harder to manipulate than earnings and is usually more stable. P/CF typically uses CFO, FCFE or adjusted cash flow. Be careful with simple cash flow, which ignores working capital changes, and always check how the cash flow is defined.