Beyond P/E: Choosing the Right Multiple

Chapter 2 introduced P/E as the headline equity multiple. In practice, analysts reach for a specific multiple depending on the industry and situation — using P/E everywhere is a common beginner mistake this deep dive is built to fix.

EV/EBITDA — the multiple that ignores capital structure

P/E is an equity multiple (price is per-share, earnings are after interest expense) — it's directly affected by how much debt a company carries, since more debt means more interest expense, which lowers net income and EPS. EV/EBITDA compares enterprise value (Chapter 2's debt-and-cash-adjusted figure) to EBITDA (earnings before interest, taxes, depreciation, and amortization) — a measure that ignores capital structure entirely. This makes EV/EBITDA the standard choice for comparing companies with meaningfully different debt levels, which is almost always true in a comps set spanning multiple companies, and is why it dominates M&A and LBO valuation work specifically (Chapter 10) — a PE firm buying a company with an entirely new capital structure needs a multiple that doesn't care what the old one was.

PEG — adjusting for growth

A stock trading at 40x earnings looks expensive next to one at 15x — until you learn the first company is growing earnings 35% a year and the second is growing 3%. The PEG ratio (P/E ÷ expected earnings growth rate) adjusts for this: a PEG near 1.0 is the classic (if rough) heuristic for "growth priced fairly," well above 1.0 suggests the market may be paying up for growth beyond what's likely to materialize, and well below 1.0 can flag an overlooked, undervalued grower. The honest caveat: PEG is only as good as the growth estimate feeding it, which is itself a forecast, not a fact.

Why different sectors use different preferred multiples entirely

• Banks and insurers: valued primarily on P/B (Price-to-Book), not P/E or EV/EBITDA — a bank's balance sheet (loans, deposits) is the business in a way that doesn't map cleanly onto EBITDA, and regulatory capital requirements are themselves book-value-based.
• REITs (real estate investment trusts): valued on P/FFO (Price to Funds From Operations), since standard net income is distorted for a REIT by heavy depreciation charges on real estate that don't reflect real economic wear in the way a factory's depreciation might.
• Early-stage, pre-profit growth companies: often valued on EV/Sales, simply because there's no positive earnings or EBITDA yet to put in a denominator.

Forward vs. trailing — which period's numbers

Any of these multiples can be calculated on trailing (the last 12 reported months, "LTM") or forward (analysts' estimate for the next 12 months, "NTM") financials. Forward multiples are more forward-looking by construction (useful for a company where growth is expected to change the picture materially) but introduce estimate risk — trailing multiples are certain, forward multiples are a bet on the estimate being roughly right. A well-formed comps table usually shows both, and a real analyst is explicit about which one they're leaning on and why.

The actual interview-ready takeaway

Naming the right multiple for a given company — not just computing a multiple correctly — is what separates someone who's memorized formulas from someone who understands valuation. "I'd use EV/EBITDA here rather than P/E because this company carries meaningfully more leverage than its peers" is a stronger sentence than reciting the P/E formula ever will be.