The Comprehensive Guide to

Passive Income Investing

Learn the secrets of how Paul Tracy generates over \$XXX,XXX per month in passive income!

How to Become Financially Independent Through Passive Income Investing

## What is a Price Multiple?

A price multiple is a ratio that combines some measure of a company's performance and the company's stock price.

## How Does a Price Multiple Work?

In general, a price multiple ratio looks like this:

Price multiple = Price / Performance Metric

For example, Company XYZ has revenue of \$20,000,000 per year. It has 1,000,000 shares outstanding. Today, the company’s stock price is \$20 per share. Using the formula above, we can calculate Company XYZ's price-to-revenue multiple:

Revenue multiple = \$20 / (\$20,000,000/1,000,000) = 1.0

In Company XYZ’s industry, most companies trade at or below a 0.80 multiple, implying that Company XYZ is overvalued.

## Why Does a Price Multiple Matter?

There are a plethora of price multiples, but some of the most common include:

Price / EPS
Price / EBITDA per share
Price / Book value of assets per share
Price / Revenues per share

Price multiples are usually used to gain some insight about whether a company's stock price (and thus a company's value) is too high or too low.