This module 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 1 of 9 · 14 min
Price multiples and the method of comparables
A price multiple compares a share's price with a per-share fundamental; you can judge it against fundamentals (the justified P/E from the Gordon model) or against similar companies (the method of comparables).
In short
- Main multiples: P/E, P/B, P/S and P/CF (cash flow = operating or free cash flow).
- Trailing multiples use past values; forward (leading) multiples use forecasts. Use the same basis for every company compared.
- Justified forward P/E from the Gordon model: , where p = payout ratio.
- P/E rises with g, falls with r. A higher payout need not raise P/E, because it can lower growth (dividend displacement of earnings).
- Method of comparables rests on the law of one price: benchmark a multiple against a close peer, the industry average or median, or the company's own history.
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