Price Earnings Multiple (p/e)
(Anand)
Earnings per share/EPS is obtained by dividing the company''s share price by its EPS or by dividing the company''s market capitalisation by its net profit (or, depending on the definition used, its ordinary net profit, means net profit before goodwill amortisation and/or exceptional P&L charges/income). In general, higher growth prospects and a higher profitability may justify a higher pe multiple. An EV/EBITDA multiple is often preferred to a PE multiple for a sector valuation comparison as (1) it is less influenced by accounting issues (EBITDA and OpFCF are derived from the P&L, but above the level of amortisation, exceptionals and taxation, unlike the EPS, which is the bottom-line profit) and (2) EV multiples take into account the impact of the balance sheet structure on the valuation of equities.
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