Lesson 7 of 9 · All lessons in this module
- Intrinsic value, mispricing and the three model familiesVideo lesson
- Dividends, splits, buybacks and the payment timelineVideo lesson
- Present value models: DDM and FCFEVideo lesson
- Preferred stock and the Gordon growth modelVideo lesson
- Multistage dividend discount modelsVideo lesson
- Price multiples and the method of comparablesVideo lesson
- Integrated cases: why multiples differ, the justified P/E and comparables
- Enterprise value multiples, asset-based valuation and choosing a modelVideo lesson
- Integrated cases: growth from dividend history, enterprise value and reconciling models
Lesson 7 of 9 · 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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