Price Multiples: P/E, P/B and EV/EBITDA

"Trading at 15 times earnings" packs a whole valuation opinion into three words. A multiple is nothing more than price divided by some measure of fundamental value, but the choice of which price and which fundamental changes what the number is actually comparing, and mixing them up is the most common error in a quant or banking interview.

P/E divides share price by earnings per share (equivalently, equity value by net income):

It is an equity-value multiple, net income already sits after interest payments, so it reflects a claim only on what is left for shareholders. That makes P/E sensitive to leverage: two operationally identical companies with different debt loads will show different P/E ratios purely from financing.

P/B divides price by book value per share, comparing the market's opinion to the accountants', useful for banks and insurers where book value is close to the assets actually being valued (loans, securities), less useful for a company whose real assets are people and code.

EV/EBITDA divides enterprise value by EBITDA:

This is a firm-value multiple: the numerator (EV) already includes debt, and the denominator (EBITDA) is measured before interest, so the leverage effect cancels out on both sides. That is why bankers use EV/EBITDA to compare companies with different capital structures, and P/E to compare what a levered shareholder actually earns.

A worked example

Company A: share price $40, EPS $2.50 → $P/E = 40/2.50 = 16.0\text{x}$. Its enterprise value is $3,200m and EBITDA is $400m → $EV/EBITDA = 3{,}200/400 = 8.0\text{x}$.

Now compare to Company B, operationally near-identical but funded with much more debt: same EV/EBITDA of 8.0x, but heavier interest expense drags net income down, pushing P/E to 22.0x on the same underlying business. EV/EBITDA says the operations are priced the same; P/E alone would have wrongly suggested Company B is "more expensive."