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Earnings Multiplier

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]
… and Washington Conference, 1994 Stanford Summer Research Conference, 1994 Mitsui Financial Economics and Accounting … many working capital accruals are common to both financial accounting and … earnings is predicted to be negatively related to the earnings multiplier …

1979 Competitive Manuscript Award: Valuation of Earnings Components in the Electric Utility Industry1979 Competitive Manuscript Award: Valuation of Earnings Components in the Electric Utility Industry
www.jstor.org [PDF]
… and Washington Conference, 1994 Stanford Summer Research Conference, 1994 Mitsui Financial Economics and Accounting … many working capital accruals are common to both financial accounting and … earnings is predicted to be negatively related to the earnings multiplier …

Fundamental analysis models in financial markets–Review studyFundamental analysis models in financial markets–Review study
www.sciencedirect.com [PDF]
… and Washington Conference, 1994 Stanford Summer Research Conference, 1994 Mitsui Financial Economics and Accounting … many working capital accruals are common to both financial accounting and … earnings is predicted to be negatively related to the earnings multiplier …

The ability of EVA (Economic Value Added) attributes in predicting company performanceThe ability of EVA (Economic Value Added) attributes in predicting company performance
academicjournals.org [PDF]
… and Washington Conference, 1994 Stanford Summer Research Conference, 1994 Mitsui Financial Economics and Accounting … many working capital accruals are common to both financial accounting and … earnings is predicted to be negatively related to the earnings multiplier …

A theory of price-earnings ratiosA theory of price-earnings ratios
www.tandfonline.com [PDF]
… and Washington Conference, 1994 Stanford Summer Research Conference, 1994 Mitsui Financial Economics and Accounting … many working capital accruals are common to both financial accounting and … earnings is predicted to be negatively related to the earnings multiplier …

The economics of earnings manipulation and managerial compensationThe economics of earnings manipulation and managerial compensation
onlinelibrary.wiley.com [PDF]
… and Washington Conference, 1994 Stanford Summer Research Conference, 1994 Mitsui Financial Economics and Accounting … many working capital accruals are common to both financial accounting and … earnings is predicted to be negatively related to the earnings multiplier …



Q&A About Earnings Multiplier


What is the multiplier?

The multiplier is a factor of proportionality that measures how much an endogenous variable changes in response to a change in some exogenous variable.

How does the multiplier work?

For example, suppose x increases by one unit, which causes y to increase by M units. Then the multiplier is M.

Is a discounted cash flow similar to a discounted cash flow?

Yes, they are similar in that they both discount future earnings.

How does the earnings multiplier compare expected growth to an amount of money invested over the same period at current rates?

It allows investors to compare expected growth to an amount of money invested over the same period at current rates.

What are two different measures of money being considered here?

Two different measures of money being considered here are M2 and commercial banks create money from loans given out by them (the so-called "multiplier effect").

What is the earnings multiplier?

The earnings multiplier is an adjustment made to a company's PE ratio that takes into account current interest rates.

What do investors use the earnings multiplier for?

Investors use it figure out how much a company is worth, today, based on how it is expected to grow in the future.

What are two multipliers commonly discussed in introductory macroeconomics?

Commercial banks create money, especially under fractional-reserve banking system used throughout the world. In this system, money is created whenever a bank gives out a new loan. This is because the loan, when drawn on and spent, mostly finishes up as a deposit back in the banking system and is counted as part of money supply. After putting aside a part of these deposits as mandated reserves, the balance is available for making further loans by the bank. This process continues multiple times and it's called "multiplier effect".

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