Comparable multiples without denominator traps

Learning goals

• Explain equity multiples using mechanisms and limitations.
• Explain enterprise multiples using mechanisms and limitations.
• Explain comparable economics using mechanisms and limitations.

Draft · approximately 25 minutes, excluding further revision.

Equity multiples

Trailing P/E uses past earnings; forward P/E uses forecast earnings. Keep share counts, exceptional items and the earnings period compatible with price.

A negative earnings denominator makes ordinary positive-P/E comparisons uninformative; do not rank a negative P/E as automatically cheaper.

Enterprise multiples

Enterprise-value multiples match all-capital value with before-financing operating measures; equity value divided by EBITDA mixes incompatible claims.

P/B can be useful when book capital reflects economics, but asset accounting, profitability and impairment affect comparability; an intangible-heavy firm can look expensive mechanically.

Comparable economics

A peer median reduces sensitivity to extremes but cannot correct an unsuitable peer set; compare leverage, growth, margins, accounting and geography.

Higher justified P/E can reflect higher expected growth or lower required return; a market multiple should be explained by fundamentals rather than applied blindly.

Past, current and forward denominators must match the valuation date

Trailing multiples use a past reported period, current multiples a defined current estimate, and forward multiples a forecast period. A low forward P/E can reflect optimistic earnings rather than cheapness. Normalize one-off items and compare peers on the same horizon, accounting basis and claim type. A multiple applied at the terminal date creates a value at that date, not automatically a present price.

If next-year terminal valuation uses a justified multiple 15 on following-year EPS 3, terminal share value 45 discounted one year at 10% is 40.9091 before any separate intervening dividend. Applying the multiple to old EPS 2 would instead produce 30 at the terminal date and answers a different question. Do not count a dividend twice by mixing total-distribution and ex-dividend definitions.

Formula and assumptions

Price indication=comparable P/E×consistent EPS

Original applied case: Comparable multiples without denominator traps

1. Comparable forward P/E is 14 and normalized next EPS is 3.2; assume the comparison is defensible.
2. Indicated price=14×3.2=44.8. This is conditional on earnings quality and comparability.
3. A different capital structure or growth outlook can justify a different multiple, so report a range.

Errors to catch

• Do not assume: Trailing and forward P/E use identical denominators by definition.
• Do not assume: A negative P/E always proves cheapness.
• Do not assume: Equity value/EBITDA matches the same capital claims.

Original knowledge check

Answer every question before checking. Review explanations after submitting; retry starts a new attempt.

Sources and coverage status

These original lessons are drafts. Public outlines are used to check scope; the official learning-outcome text and proprietary question banks are not reproduced here. Follow the source for exam-year requirements and updates.

• Reference · www.cfainstitute.org
• Reference · www.investor.gov