What is the ‘Earnings Multiplier’
The earnings multiplier is an adjustment made to a company’s P/E ratio that takes into account current interest rates. The earnings multiplier is used to discount future earnings, and allows investors to compare expected growth to an amount of money invested over the same period at current rates.
Explaining ‘Earnings Multiplier’
The earnings multiplier is similar to a discounted cash flow in that future earnings are rolled back to determine how much they are worth in today’s dollars. Investors use the earnings multiplier to figure out how much a company is worth, today, based on how it is expected to grow in the future.
Further Reading
- Financial statement information and the pricing of earnings changes – www.jstor.org [PDF]
- 1979 Competitive Manuscript Award: Valuation of Earnings Components in the Electric Utility Industry – www.jstor.org [PDF]
- Fundamental analysis models in financial markets–Review study – www.sciencedirect.com [PDF]
- The ability of EVA (Economic Value Added) attributes in predicting company performance – academicjournals.org [PDF]
- A theory of price-earnings ratios – www.tandfonline.com [PDF]
- The economics of earnings manipulation and managerial compensation – onlinelibrary.wiley.com [PDF]
