Which ratio is commonly used in the comparable multiples method?

The price earnings ratio, often referred to as the P/E ratio, is a key metric used in the comparable multiples method for valuing companies. This ratio measures a company's current share price relative to its earnings per share (EPS). It is particularly useful in comparing valuations across similar companies within the same industry because it provides insight into how much investors are willing to pay for each dollar of earnings.

The approach often involves gathering the P/E ratios of comparable companies (peers in the same sector with similar growth prospects) and using this information to assess the valuation of the target company. By applying the average or median P/E ratio of these comparable firms to the target’s earnings, investors can estimate a fair market value for the company.

This method hinges on the assumption that similar companies should be valued similarly, which makes the P/E ratio especially relevant, as it captures investors' perceptions about a company's future growth potential in relation to its earnings. Other ratios, while informative, do not serve the same purpose in the comparable multiples method.