The formula to calculate the Earnings Multiple is:
\[ EM = \frac{MV}{NI} \]
Where:
An earnings multiple, also known as the price-to-earnings (P/E) ratio, is a financial metric used to evaluate the value of a company. It is calculated by dividing the market value of equity by the net income of the company. This ratio indicates how much investors are willing to pay for each dollar of earnings, providing insight into the company’s valuation. A higher earnings multiple suggests that investors expect higher growth in the future, while a lower multiple may indicate lower growth expectations or undervaluation.
Let's say you have a market value of equity (MV) of $1,000,000 and a net income (NI) of $100,000. Using the formula:
\[ EM = \frac{1000000}{100000} = 10 \]
So, the earnings multiple (EM) would be 10.