Price and Value: A Guide to Equity Market Valuation Metrics

© George Calhoun 2020

G. CalhounPrice and Valuehttps://doi.org/10.1007/978-1-4842-5552-0_5

5. Applications: P/E As an Independent Variable

George Calhoun¹ 

(1)

Jersey City, NJ, USA

 

In the previous chapter, the P/E and other multiples are considered as signals generated by underlying explanatory factors (such as earnings growth). In this chapter, the P/E itself is viewed as the factor that explains or predicts future outcomes and can therefore be used to support, or trigger, significant decisions.

The chief applications of market multiples include

• Guiding investment strategies

• Valuing corporate transactions – acquisitions, divestitures, mergers, joint ventures, and private equity investments

• Illuminating macro-trends in the market and potentially providing ...