Analysing companies · 04 / 05
How to connect P/E, EV/EBITDA, and P/FCF with growth, quality, margins, cycle, and risk.
A multiple relates a market price to an economic measure. It is a quick comparison tool, not a complete valuation. The denominator may be temporary, adjusted, or poorly comparable.
Use the same currency, period, and definition. Separate reported figures from estimates and check whether exceptional items were removed consistently.
P/E divides market capitalisation by net income, or price per share by earnings per share. It connects equity value with profit available to shareholders.
It is intuitive but less useful with losses, highly cyclical earnings, or large differences in leverage. Trailing P/E uses reported profit; forward P/E relies on forecasts.
EV/EBITDA compares enterprise value—market capitalisation plus net debt and other adjustments—with EBITDA. It can help compare companies with different financing structures.
It does not treat investment in assets as a full economic cost. Capital-intensive companies may look cheap because EBITDA ignores depreciation and future capex needs. Leases, pensions, and acquisitions also require attention.
P/FCF divides market capitalisation by free cash flow attributable to shareholders. It brings price closer to cash available after operating and investing in the business.
FCF can swing with working capital, delayed capex, or one-off payments. Normalise several years and distinguish maintenance from growth investment where data allows.
Compare today’s multiple with the company’s own history, but ask what changed. Business mix, interest rates, debt, dilution, and maturity may make an old average irrelevant.
In a cyclical business, peak earnings can produce an artificially low P/E. At the bottom, a high P/E may coexist with a future recovery. Use normalised earnings and margins.
Growth supports a higher multiple only when it creates value. Examine returns on capital, required reinvestment, and the likely duration of growth.
Recurring revenue, pricing power, good cash conversion, and a resilient balance sheet may reduce fragility. Exceptional margins prompt a question: are they defensible, or will they attract competition?
Interest rates, demand, commodities, and credit affect sectors differently. Compare companies at the same point in the cycle and test a normalisation scenario.
Risk does not fit in one number. Customer concentration, regulation, currency, debt, and governance may justify a discount even when growth looks strong.
A company at €40 per share with €2 of earnings has a P/E of 20. If normalised earnings are €1.25, adjusted P/E would be 32; if FCF per share is €1.60, P/FCF would be 25.
These calculations illustrate the mechanics; they are not a forecast.
Use multiples as a starting point, then move to margin of safety, where value, price, and uncertainty meet.
How to interpret available cash and relate it to price without losing context.
Why a prudent gap between price and estimated value can help when outcomes are uncertain.
Learn is general educational content. It is not personalised advice and does not guarantee outcomes.