Valuation and the investment decisionLevel 2Products9 minUpdated 22 Oct 2026

P/E and other valuation multiples

Valuation multiples don't tell you whether a stock is cheap. They tell you what you pay for what you get, and you can only draw conclusions from that by comparing.

What you'll learn

What P/E, P/B, EV/EBIT and dividend yield mean
What each multiple is best used for
Why a multiple alone doesn't settle anything

A multiple is the price relative to something

All valuation multiples work on the same logic: the price divided by some figure from the business. This makes companies of different sizes comparable.

What it tells you

How many years of earnings you pay for the share. A P/E of 15 means you pay 15 times one year's earnings.

When it doesn't work

For a loss-making company, the P/E is meaningless. One-off items and a strong economic cycle easily distort it.

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P/E ratio and dividend yield: what do they tell you about a stock's valuation?

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A multiple is meaningless without a comparison

A P/E of 12 is neither cheap nor expensive. It is a number that only gains meaning through comparison. Three sensible points of comparison:

The company's own history

At what multiples has this company typically been priced? A deviation tells you that something has changed.

Companies in the same industry

Industries are priced differently. Only compare businesses that are comparable with each other.

Growth and quality

A fast-growing company with a high return on capital deserves a higher multiple. The difference can be justified.

This is why simply looking for the lowest P/E leads you astray. A low multiple is often the market's signal that earnings are expected to weaken.

Chart · illustrative example

Same P/E, two different stories

Both companies have a P/E of 12. The level of the multiple doesn't tell you which is the better investment.

Company A · stable

P/E now: 12
Own history: 11–14
Earnings growth: +5% / yr
Return on capital: 18%

Priced normally

Company B · declining

P/E now: 12
Own history: 18–22
Earnings growth: −12% / yr
Return on capital: 7% and falling

The market expects earnings to fall

Company B looks just as attractive, but its multiple has fallen below its own history. If earnings fall 12%, next year's P/E is already 13.6 at the same price. The cheapness disappears by itself: the low multiple was a warning, not a find.

Past or future earnings?

The same multiple can mean two different things depending on which figure is used.

Trailing

Based on earnings already reported.

A reliable figure, but it looks backward. It can be misleading if the business has just changed.

Forward

Based on an estimate of future earnings.

More relevant for an investment decision, but based on a forecast, which can turn out to be wrong.

This content is for information purposes only and should not be construed as investment advice or a recommendation. Investing always involves the risk of losing capital. The value of financial instruments and investments can go up or down, and past performance is no guarantee of future returns.

Check question

Test yourself: valuation multiples

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What does a P/E of 15 mean?

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What does an exceptionally high dividend yield often tell you?

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