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In Finance, what is a Multiple Approach?

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  • Written By: Osmand Vitez
  • Edited By: Kristen Osborne
  • Last Modified Date: 24 August 2018
  • Copyright Protected:
    2003-2018
    Conjecture Corporation
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A multiple approach is a process for valuating a firm’s assets. Investors use this approach when determining the attractiveness of a company’s stock. Individuals also can use this process when comparing the financial information of multiple companies for non-investment purposes. For example, this approach is common when comparing profits margins or cash flow. This analysis is often specific to a single business industry or sector, measuring each firm’s strength in the overall market.

When valuing a company’s stock, the price to earnings formula is often seen as one of the most important figures. Earnings per share is calculated by taking net income less dividends divided by the average outstanding shares of stock. This lets investors know how much money the company can reinvest back into operations to generate more value in the future. The multiple approach takes this valuation one step further. Investors will divide the current stock price by the latest earnings per share released by the company. This will result in a figure known as the multiple, which helps investors estimate the future price for the company’s stock. For example, a multiple of 12 and future earnings per share of $2.50 US Dollars (USD) will indicate the stock price should increase to $30 USD. Investors will then determine if the multiple approach is suitable for estimating future stock price increases or decreases.

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The multiple approach allows investors to compare the potential value growth of a variety of companies in the overall market. The multiple also indicates whether the company is higher or lower than similar firms, which can result in fewer investors seeing the company’s stock as a worthy investment. For example, the company’s multiple of 12 is less favorable if the industry’s average multiple is 15. This means the company will experience less growth if earnings per share is comparable among the companies within the industry.

Individuals — both investors and non-investors — can use a multiple approach to evaluate companies through gross profit measurements. This allows for the comparison of companies in a method outside of stock price. The gross profit ratio is calculated by figuring sales less cost of goods sold divided by sales. This multiple approach helps show how much money the company has left to pay operating expenses and stakeholders in the company. This figure allows for the comparison of companies in different industries, making the multiple approach more attractive than the stock multiple. The comparison of gross profit is key for determining whether companies can remain competitive and in business for future years.

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John57
Post 2

@andee - I don't know how long you have been investing in stocks, but I have been doing this for a long time.

The internet has made a huge difference in the amount of information we now have at our fingertips. Many years ago you would have to subscribe to something like the Wall Street Journal to have access to this information.

Now there are hundreds of financial sites on the internet where you can find this information at any time of the day without paying a fee.

With one quick look at the earnings multiple, and comparing it to other companies within the industry, you can have a good idea if this would be a good investment or not.

andee
Post 1

When I first began trading stocks, I really understood very little about what actually makes a company profitable.

I quickly found out how important it is to understand the company you want to invest your money in. One of the first things I learned was the P/E ratio and how this could affect stock price.

After doing more research and reading about fundamentals, I realized how beneficial it could be to take a market multiple approach. This just helps me see a broader view of the company and I feel like I can make a much more informed investment decision.

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