Earnings: It is appropriate to understand the word ‘earnings’ before learning about earnings multiple or earning multiplier model. Earnings is defined as the Net Profit after deducting all expenses including taxation. Copy the link given below and paste it in new browser window to get more information on Earnings Multiplier Model:- www.transtutors.com/homework-help/finance/earnings-multiplier-model.aspx

1. Earnings Multiplier
Model

2. What is an Earnings Multiple?
A Share’s Price Tag on Earnings
Other names –
• Price to Earnings ratio
• Price to Earnings multiple
• Price Multiplier
Formula
PE ratio = Market Price per share OR Market Capitalization
Earnings per share Total Earnings
Importance
Useful for investors in making ‘buy, sell, hold’ decisions, in
planning their timing of actions and to make comparisons across
different companies.

3. Calculating Earnings Multiples
Earnings multipliers are calculated in 2 ways depending on EPS
Trailing Earnings Multiple
PE ratio = Market Price per share
‘Trailing’ Earnings per share
• Uses Historical Information (of last
year/ last 4 quarters/ last 12
months)
• Objective method
• Will the company perform exactly
how it did earlier?
Forward Earnings Multiple
PE ratio = Market Price per share
‘Forward’ Earnings per share
• Uses Forecast Information (of next
year/ next 4 quarters/ next 12
months)
• Subjective method
• More relevant to investors

4. Earnings Multiplier Valuation
Step 1: Decide if trailing earnings multiplier/ forward earnings multiplier/
combination is to be used
Step 2: Select suitable peer companies in the industry (if unlisted)
Step 3: Calculate the Earnings Multiplier for valuation
Method 1 – based on industry average PE ratio
Method 2 – based on Gordon’s growth model formula
Step 4: Valuation 
Earnings Multiplier X EPS or Total earnings
Step 5: Apply a discount rate (if necessary)

5. Pros and Cons
of Earnings Multiplier Valuation
Pros:
Useful in investment decisions,
relative valuation model
Simplicity, easy to use and
meaningful
Uses common market indicators:
share price and PE ratio
Excellent planning and controlling
tool for small business valuations
Cons:
Selection of comparative peers is
difficult and subjective
Applying industry average of
listed companies on private
company is less accurate
Market price used for calculation
is subject to change every other
moment

6. Earnings Multiple Valuation by
Industry
Depending on the nature of operations, the definition for ‘earnings’ may have to
be altered to be meaningful and to best suit and for different industries.
Variation of Earnings Multiplier Applied Industries/ Companies
Market Value / Revenue Start-up companies
Market Value / Cash earnings Small businesses in cash basis accounting
Market Value / EBITDA Many consumer & industrial companies
Market Value / EBITA Companies with high leased assets
Market Value / EBITDAX Companies with high exploration costs
Market Value / EBITDAR Companies with high rental costs
Market Value / Book Value of equity Companies with high fluctuations in earnings
Market Value / Fund from Operations Real estate
Market Value / Earning to growth Companies with high growth

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