Lesson 10 of 10 · All lessons in this module
- Price multiples and the method of comparablesVideo lesson
- The relative valuation process
- Justified multiples: forecasted fundamentals, PEG and regression
- P/E in depth: earnings yield, PVGO and normalized earnings
- Sales, dividend, cash flow and industry-specific multiples
- Enterprise value multiples, asset-based valuation and choosing a modelVideo lesson
- EV/EBITDA drivers and value-to-book multiples
- Choosing a peer group: industry and factor approaches
- Current, past and forward multiples, and terminal values
- Integrated cases: why multiples differ, the justified P/E and comparables
This lesson is part of the 2027 curriculum. You are following the 2026 curriculum, where it is not taught in this form. Switch if you are sitting the exam under the 2027 curriculum.
Lesson 10 of 10 · 18 min
Integrated cases: why multiples differ, the justified P/E and comparables
A P/E gap is explained by growth, payout and risk together; the justified P/E needs normalised inputs and a sensitivity check; and a multiple judged against history and peers can give conflicting signals that call for more information.
In short
- To explain a P/E gap, sort each data item into growth (g = retention × ROE), payout and risk (the required return r), then compute justified P/Es to see which effect wins.
- Payout and growth are linked: when ROE > r, retaining more earnings raises the P/E; when ROE < r, paying out more raises it.
- Normalise payout and ROE before using p / (r − g): a one-off year makes reported inputs mislead.
- Justified P/E is very sensitive to r, g and payout; show a grid, not one number.
- Judge a multiple against its own history and peers; when multiples conflict, look for more information (quality of earnings, growth, EV multiples) rather than force a verdict.
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