Valuation Multiples – P/E, P/B, EV/EBITDA Ratio Hints for Marketers
Valuation multiples are financial measurement tools that evaluate one financial metric as a ratio of another, in order to make different companies more comparable. As a marketer, not only is it necessary to understand your company, but also learning from peers or competitors with better valuation is a way to refer and grab inspirational ideas. This article briefly goes through 3 main valuation multiples which investors pay more attention to, and marketers should be aware of the value.
Valuation multiples are financial measurement tools that evaluate one financial metric as a ratio of another, in order to make different companies more comparable. As a marketer, not only is it necessary to understand your company, but also learning from peers or competitors with better valuation is a way to refer and grab inspirational ideas. This article briefly goes through 3 main valuation multiples which investors pay more attention to, and marketers should be aware of the value.
Table of Contents on Valuation Multiples – PE, PB, Enterprise Value Hints for Marketers and Investors
- What is valuation multiples and what types it has
- PE or Price-to-Earnings Ratio
- PB or Price-to-Book Value Ratio
- EV/EBITDA Ratio
- Easy2Digital Financial Data API
What is valuation multiples and what types it has
Valuation multiples are financial measurement tools that evaluate one financial metric as a ratio of another, in order to make different companies more comparable. The purpose of using valuation multiples is easily for public eyes and investors to identify the company market value and investment value.
Multiples are the proportion of one financial metric (i.e. Share Price) to another financial metric (i.e. Earnings per Share). It is an easy way to compute a company’s value and compare it with other businesses
There are two main types of valuation multiples:
- Equity Multiples: It’s used for people or entities who consider buying the stock or not
- Enterprise Value Multiples: It’s used for any companies that are looking for proper companies to acquire and merge.
PE or Price-to-Earnings Ratio
The price-to-earnings ratio is the ratio for valuing a company that measures its current share price relative to its earnings per share (EPS). The price-to-earnings ratio is also sometimes known as the price multiple or the earnings multiple.
P/E ratios are used by investors and analysts to determine the relative value of a company’s shares in an apples-to-apples comparison. It can also be used to compare a company against its own historical record or to compare aggregate markets against one another or over time.
Here are the equations of PE and EPS as follows:
PE = Market Price per Share / Earnings per Share (EPS)
EPS = Net Income / Total Shares
A high P/E ratio could mean that a company’s stock is overvalued, or that investors are expecting high growth rates in the future.
Hints for Marketers:
Briefly investigating why a company has higher or lower PE is helpful to observe and learn tips from how these companies plan ahead in marketing and educate the market. Notably, PR and content campaigns to build a branding is critical when PE is much higher than peers.
Continuously testing new selling and marketing approaches that can boost profit can help boost earnings and decrease the P/E. Try standing on a bigger picture when planning a marketing strategy for your business.
Appropriate or lower P/E compared to industrial competitors and peers can sustain appealing potential investors and boost the efficiency of fundraising and maintain brand image
PB or Price-to-Book Value Ratio
Companies use the price-to-book ratio (P/B ratio) to compare a firm’s market capitalization to its book value. It’s calculated by dividing the company’s stock price per share by its book value per share (BVPS). The price-to-book ratio is often used by value investors looking for stocks that are underpriced by the market.
An asset’s book value is equal to its carrying value on the balance sheet, and companies calculate it by netting the asset against its accumulated depreciation.
Here are the equations of PE and EPS as follows:
P/B = Market Price per Share / BVPS (Book Value per Share)
BVPS = (Asset - Liability) / Total Shares
The price-to-book ratio is used by value investors to identify potential long-term investments. Normally, lower P/B, more long-term investment potential the company has as it might be undervalued, or the target market price per share can be much higher than now in the future.
Hints for Marketers:
Apart from boosting sales, profit, intangible asset increasing is another critical ground that marketers can strategize to contribute to lower the company’s BVPS. The intangible asset includes patents, trademark, NFTs, tokenized asset, IP etc.
Furthermore, lower BVPS efficiently appeals to audiences who are interested in long-term investment. So if you were a marketer in an insurance company, advertising target to those traffic who are interested in these status of companies can be an option to test when running online branding and acquisition campaigns.
EV/EBITDA Ratio
EV/EBITDA is a ratio that compares a company’s Enterprise Value (EV) to its Earnings Before Interest, Taxes, Depreciation & Amortization (EBITDA). The EV/EBITDA ratio is commonly used as a valuation metric to compare the relative value of different businesses.
Essentially, EV/EBITDA is used to evaluate if the company is worthy to acquire or merge compared to peers in the same industry. Higher EV/EBITDA, higher value to be acquired. Notably those companies do a niche market or sell products that can be part of larger giant ecosystem.
Here are the equations of EV/EBITDA, EV as follows:
EV/EBITDA = Enterprise Value / EBITDA
Enterprise Value = Market Capitalization + Total Debt - Cash and Cash Equivalent
For more details about EBITDA, please check out this article
Profitability Ratio – Gross Margin, EBITDA Margin, Net Margin Hints for Marketers and Investors
Hints for Marketers:
As a marketer, be sure to build a brand awareness and company image to appeal potential buyers to acquire your company when your company tends to be acquired and focus to boost the EV/EBITDA.
Easy2Digital Financial Data API
For any tickers or symbol you like to fetch dataset over the years to analyze the valuation multiples, please visit Easy2Digital API section and subscribe to Easy2Digital newsletter by leaving a message “API number + free trial”. We will send you asap.
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If you are interested in using Python to connect with Easy2Digital Financial data API to fetch the valuation multiples dataset, please check out this article
Python Tutorial 60 – Stock Symbol Data Scraper for Financial Ratio Analysis
