|$168/EPS of $5.57||=||P/E of 29.62|
|$168/PE of 29.62||=||EPS of $5.67|
Multiple 2: P/E
P/S: the Price to Sales ratio, in contrast to the P/E ratio, is the price of the share divided by the total annualised sales made by the company in the most recent reporting period. Sticking to the example of Apple, in order to calculate Apple’s P/S ratio, you first divide the company’s total 2021 sales of $378.35 billion by the total number of shares listed on the exchange, 16.32 billion shares in Apple’s case, giving you the Sales per Share. You then divide the stock price (P) by the Sales per Share to get the P/S multiple.
|$378.35 bln/16.32 bln||=||$23.18 per share|
|$168/ $23.18||=||P/S of of 7.24|
Multiples are used as a benchmark to compare stock prices. It will give a good idea if a stock is well priced or not. Low multiples may indicate good value but could equally indicate that a stock is not ‘hot’ as its financial outlook (future revenues) does not excite investors.
Putting multiples to the test: comparing Tesla to BMW
Coming back to the earlier comparison of Tesla and BMW, their market caps are vastly different, but how do their multiples compare? BMW makes more cars and makes more money than Tesla. Tesla’s P/E is 170.32 and its P/S is 17.98. BMW – in contrast - has a P/E of 5.12 and a P/S of 0.56. Given that BMW also makes electric cars, do these multiples makes sense and which company would you invest in? Which has the better relative price? If you believe Tesla will win the electric car race, your money maybe on Tesla. But BWM does look cheap in comparison and maybe the better buy?
Of course, marketcap, P/E and P/S ratios are not the only metrics to look at when investing, but they certainly make for a very good start. This type of information can easily be found on financial websites or on companies’ own websites to help you on your way.
And if you do like the idea of investing, (1) know your multiples; (2) check the income statements and balance sheets of each company/stock you think of investing in (also found on the websites) and (3) create a watchlist and paper-trade for a good while, taking in as much information as you can, before putting your money where your metrics are.