Damodaran on Valuation

Chapter 8. Equity Multiples

When investing in a stock, our interests primarily lie in whether the equity in a company is fairly priced. It follows logically that we look at equity multiples, where we relate the market value of equity to the earnings or book value of equity in that company. In this chapter, we begin by looking at the variants on equity multiples ranging from the widely used P/E ratios to less commonly used multiples such as price to free cash flow to equity (P/FCFE). We then examine the distributional characteristics of the most widely used equity multiples and the determinants of these multiples. We close the chapter with a series of applications where we use the analytical tools developed to make judgments on valuation.