NISM-Series-XV: Research Analyst · Valuation Principles

Relative Valuation Multiples: P/E, P/B, EV/EBITDA and PEG

Updated 11 October 2026 · Fact-checked

Relative valuation estimates a stock's value by comparing its multiple, such as P/E, P/B, EV/EBITDA, P/S or PEG, with the multiples of similar companies. You pick a comparable peer set, find the peer multiple, apply it to the company's own metric, and then adjust for differences in growth, risk and quality.

Understand Relative Valuation Multiples

A multiple is a price (or value) divided by a measure of what the business earns or owns. It tells you how much the market pays for one rupee of earnings, book value, sales or EBITDA. Relative valuation says: if similar companies trade at a certain multiple, this company should trade near it too.

There are two families. Equity multiples use market price or market capitalisation in the numerator: P/E, P/B, P/S and PEG. They value the equity directly. Enterprise multiples use enterprise value (EV) in the numerator: EV/EBITDA and EV/Sales. They value the whole business, including debt, so you must subtract net debt to reach equity value.

Each multiple suits a situation. P/E works for stable, profitable companies. P/B suits banks, NBFCs and insurers, whose assets are mostly financial and carried near market value. P/S helps when earnings are negative or very low, for example early-stage firms. EV/EBITDA suits capital-intensive firms and lets you compare companies with different debt levels and depreciation. PEG adjusts P/E for growth, so a high-growth firm is not wrongly called expensive.

Peer comparison needs care. Peers should have similar business, size, growth, margins, risk and accounting. Use the median rather than the mean if one peer is an outlier. A low multiple is not automatically cheap: it may reflect weak growth or high risk. Also keep the numerator and denominator consistent, for example trailing with trailing, and EV with EBITDA (pre-interest) rather than EV with net profit.

Key formulas to remember

Price to earnings (P/E): P/E = Market price per share ÷ Earnings per share (EPS); Equivalent to market capitalisation ÷ net profit. Trailing uses past 12 months EPS; forward uses expected EPS.
Price to book (P/B): P/B = Market price per share ÷ Book value per share; Book value per share = shareholders' equity ÷ number of shares. Preferred for banks and financials.
Price to sales (P/S): P/S = Market capitalisation ÷ Revenue (or price per share ÷ sales per share); Useful when earnings are negative. Ignores margins, so compare only within the same industry.
Enterprise value (EV): EV = Market capitalisation + Total debt + Preference capital + Minority interest − Cash and cash equivalents; Some texts use net debt (debt − cash). Know that EV is the value of the whole operating business.
EV/EBITDA: EV/EBITDA = Enterprise value ÷ EBITDA; Capital-structure neutral. Equity value = EV − net debt (and other claims).
PEG ratio: PEG = P/E ÷ Expected annual EPS growth rate (in % points); Growth is entered as a number, so 20% growth means divide by 20. A PEG near or below 1 is often read as reasonable, but this is only a rule of thumb.
Implied value from peer multiple: Implied price = Peer multiple × Company's metric per share; For EV multiples: Implied EV = Peer multiple × EBITDA, then subtract net debt and divide by shares.

How to solve Relative Valuation Multiples questions

Use this sequence for any question on relative valuation multiples, whether it asks you to compute, compare or choose a multiple.

1Read what is asked: compute a multiple, find an implied value, compare with peers, or choose the right multiple.
2Identify the numerator type. Price or market cap means an equity multiple. EV means an enterprise multiple.
3Match the denominator to the numerator: EPS, book value and sales go with price; EBITDA goes with EV.
4Compute the company's multiple. For EV, build EV first: market cap + debt + preference + minority interest − cash.
5Take the peer multiple given (use the median if asked or if there is an outlier).
6For implied value, multiply the peer multiple by the company's metric. For EV multiples, subtract net debt, then divide by shares.
7Compare and interpret: a higher multiple than peers means premium; lower means discount. Check growth and risk, using PEG if growth differs.
8Check the unit and answer format: per share or total, rupees, and growth entered as a number in PEG.

Quickest way: Match the multiple to the situation

When to use it: Use this for conceptual MCQs that ask which multiple is most suitable or what a multiple shows.

Loss-making or early-stage firm: think P/S or EV/Sales.
Bank, NBFC or insurer: think P/B.
Firms with very different debt or depreciation: think EV/EBITDA.
Stable profitable firm: think P/E.
Growth differs across peers: think PEG.
Any EV question: remember to subtract net debt before finding price per share.

Common mistakes in Relative Valuation Multiples

Dividing EV by net profit or P/E-style EPS, or price by EBITDA.
Students forget that the numerator and denominator must belong to the same set of claimants.
Fix: EV pairs with EBITDA (before interest). Price or market cap pairs with EPS or net profit.
Treating the EV/EBITDA result as the share price.
The implied figure looks like a final value.
Fix: Peer multiple × EBITDA gives EV. Subtract net debt, then divide by number of shares.
Entering growth as a decimal in PEG, such as 0.20 instead of 20.
Growth is naturally written as a fraction in other formulas.
Fix: Use the percentage number. P/E of 30 with 20% growth gives PEG = 30 ÷ 20 = 1.5.
Calling the lowest-multiple stock the best buy.
Students equate low with cheap.
Fix: A low multiple can reflect lower growth, weaker returns or higher risk. Compare quality and growth before concluding.
Using P/E for a loss-making company.
P/E is the most familiar multiple.
Fix: Negative EPS makes P/E not meaningful. Use P/S, EV/Sales or EV/EBITDA if EBITDA is positive.
Comparing companies from unrelated industries.
Peer comparison is reduced to a numbers exercise.
Fix: Peers should share business model, growth, margin and risk profile. Sector norms differ widely.

Worked examples

Example 1

A company has a market price of ₹300 per share and EPS of ₹12. Expected EPS growth is 15% a year. The peer-average P/E is 20. Compute the company's P/E and PEG, and say how its P/E compares with peers.

Show the solution

P/E = 300 ÷ 12 = 25.
PEG = P/E ÷ growth = 25 ÷ 15 = 1.67 (approximately).
Compare with peers: 25 is higher than 20, so the stock trades at a premium to the peer average.
The premium may be partly explained by growth, but a PEG above 1 suggests the growth does not fully justify it by this rule of thumb.

Answer: P/E = 25; PEG ≈ 1.67; the stock trades at a premium to peers.

Example 2

A company has EBITDA of ₹500 crore, total debt of ₹800 crore and cash of ₹100 crore. It has 10 crore shares. The peer median EV/EBITDA is 8. Estimate the implied value per share using the peer multiple.

Show the solution

Implied EV = 8 × 500 = ₹4,000 crore.
Net debt = 800 − 100 = ₹700 crore.
Implied equity value = 4,000 − 700 = ₹3,300 crore.
Value per share = 3,300 ÷ 10 = ₹330.

Answer: Implied value per share = ₹330.

Exam tips

Expect questions asking which multiple suits which company type. Remember banks go with P/B and loss-makers with P/S or EV/Sales.
For EV questions, write EV = market cap + debt − cash first. Options often include answers that skip the net debt step.
In PEG questions, check that growth is used as a whole number, not a decimal.
If a statement says a low multiple always means undervalued, treat it as a trap.
NISM XV has negative marking of 25% of the marks for a question, so skip a calculation only if you cannot narrow the options after one quick pass.

Practice questions from Valuation Principles

Relative Valuation Multiples in other exams

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

Relative Valuation Multiples: frequently asked questions

What is the difference between P/E and EV/EBITDA?

P/E compares share price with earnings after interest, depreciation and tax, so it is affected by debt and accounting choices. EV/EBITDA compares the value of the whole business with operating earnings before those items. EV/EBITDA is better for comparing firms with different debt levels.

When should you use the price to book ratio?

Use P/B mainly for banks, NBFCs, insurers and other asset-heavy or financial firms whose book value reflects the value of their assets reasonably well. It is less useful for asset-light or service firms with large intangible value.

What is the PEG ratio and its formula?

PEG is P/E divided by the expected annual EPS growth rate in percentage points. It adjusts the P/E for growth. A lower PEG suggests you pay less for each unit of growth, but it depends on a reliable growth estimate.

How do you do relative valuation using peer multiples?

Select comparable companies, compute their multiple, take the median or average, and multiply it by your company's metric. For EV multiples, subtract net debt to get equity value. Then adjust the result for differences in growth, risk and quality.