Earnings Multiple

Maybe the most common Wall Street valuation metric. Earnings in this sense refers to GAAP earnings; that is...it includes all of the accounting gymnastics needed to calculate true earnings in a given period. That's stuff like the decline in value of the tractor smelting factory (depreciation) and the amortization of sales contracts slowly going away, etc.

That is, earnings ain't cash earnings...they're accounting earnings. But if a company makes a dollar a share and it trades for $20 a share, then the valuation investors are placing on those earnings are a multiple of its earnings. So in this case, assuming nothing funky is going on with the company's balance sheet, then it is being valued at 20x earnings.

What could be funky?

What if the company had $12 a share in cash and no debt on its balance sheet. Well, then the entire company is still valued at 20x earnings, but you'd say that the equity value of the company (subtract the cash) is being valued at just 8x earnings. That's the multiplier, for good, bad, and ugly.