Valuation Multiples: P/E, P/B, and EV/EBITDA Explained

Valuation multiples compare price to a fundamental metric so you can judge whether a stock is cheap or expensive relative to peers and history. Each multiple works for some businesses and misleads for others. Using the wrong one is worse than using none.

P/E (Price-to-Earnings)

P/E = Price / EPS. The most common multiple. Read it as "how many years of current earnings you pay for the stock."

• Use it for: stable, profitable companies with predictable earnings — consumer staples, utilities, mature industrials.
• Where it breaks: cyclical firms at cycle peaks (earnings look high, P/E looks cheap, but earnings are about to fall), early-stage growth companies with near-zero EPS, and firms with one-time charges distorting the E.
• Forward vs trailing: forward P/E (on next-12-month EPS estimates) is more useful but depends on analyst accuracy. Always check both.
• Benchmark context: a 20x P/E is cheap for software, expensive for a bank. Compare only within sector and against the company's own 5-10 year range.

P/B (Price-to-Book)

P/B = Price / Book Value per Share. Compares price to net assets on the balance sheet.

• Use it for: financials (banks, insurers) where book value is meaningful, and asset-heavy businesses (REITs, real estate).
• Where it breaks: asset-light companies (software, services) where book value understates the business — a 15x P/B for a software firm is meaningless.
• Watch: a bank trading below 1.0x P/B is either cheap or impaired. ROE tells you which — a low-P/B bank with 6% ROE is a value trap; one with 12% ROE may be mispriced.

EV/EBITDA (Enterprise Value to EBITDA)

EV/EBITDA = (Market Cap + Debt − Cash) / EBITDA. The cleanest cross-company multiple because it neutralizes capital structure and taxes.

• Use it for: comparing companies with different debt levels, cross-border comparisons (tax regimes differ), and capital-intensive businesses.
• Where it breaks: capital-intensive firms where depreciation is real (EBITDA flatters by ignoring it), and companies with negative EBITDA (the multiple is meaningless).
• Why professionals prefer it: EV reflects what an acquirer pays (debt assumed, cash acquired), and EBITDA is pre-financing, so it isolates operating value.

The rule that prevents mistakes

Never value a stock on a single multiple. Triangulate: a software firm on EV/EBITDA and P/E (forward); a bank on P/B and P/E; a cyclical on EV/EBITDA across the cycle, not at the peak. And always ask what the "E" or "EBITDA" is doing — a cheap multiple on peak earnings is the most expensive mistake in valuation.