An earnings multiplier is a kind of price-earnings ratio. What differentiates it from other types of price-earnings ratios is that it takes into account present interest rates. It is used to help determine the value of shares. It is determined annually.
Also referred to as P/E ratio or price multiple, a price-earnings ratio is one which shows the value of the share price taken against the amount earned per share. To compute for the P/E ratio, one must simple divide the market value per share by the earnings per share. In concrete terms, the higher the P/E ratio is, the more an investor is ready to pay in order to earn one dollar. It is therefore indicative of the company’s stock price, which is, in turn, influenced by the forces of supply and demand.
The P/E ratio is one of the figures which serves as a gauge of a company’s financial health. It may, in fact, be useful to compare the P/E ratios of different companies, in an attempt to determine where investments should be made. However, while some prospective investors may find it tempting to base their purchasing decisions solely on the P/E ratio of a particular stock, it may be useful to keep in mind that this figure can also be misleading, as it is possible to manipulate the figures to arrive at this multiple. It is therefore important to first establish how the figure for the earnings per stock was arrived at, and whether the EPS is considered basic or diluted.
