Stock Analysis Methods. The P/E Ratio and other Multiples (PDF)

Seminar paper from the year 2020 in the subject Business economics - Banking, Stock Exchanges, Insurance, Accounting, grade: 1,3, Pforzheim University, language: English, abstract: This paper aims to present a selection of the most used multiples and to point out their strengths and weaknesses. The financial markets have been deeply shaken by the spread of Covid-19 and the recent oil price shock. Also, the financial market crisis in 2008/2009 or the dotcom bubble in 2000, where many investors lost money, remain in bad memory for them. Therefore, when entering the stock market, the question arises which shares are worthwhile in the long run and at what price an investor should buy them.

There are different approaches to answer this question - one of them is the multiples approach, which has become a popular instrument for investors and financial analysts due to its simple statement and handling. According to the Merrill Lynch Institutional Factor Survey, the most popular factor used by institutional investors in stock selection was the price-earnings ratio (P/E ratio) followed by other multiples. First, the multiples approach in general is described. Afterwards, the P/E ratio with its variants is discussed in detail and in the third section, other frequently used multiples are presented. Finally, a critical appraisal is given.