EV / Earnings

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Definition

EV / Earnings answers the question, “What is a company being valued per each dollar of earnings?” A high (low) EV/Earnings mean the company is potentially overvalued(undervalued).
EV/Earnings, however, is not a good measurement.

Enterprise value applies both to shareholders and creditors while earnings solely applies to shareholders. EV / EBITDA is more accurate because they are relative to each other.


EV/Financial Metrics are often used by analysts to quickly look at a company's valuation multiples. All things being equal, the lower this ratio is, the better.

Other similar metrics include :
EV/EBITDA : How much is each dollar of EBITDA worth to investors?
EV/Revenues : Or each dollar of Revenues?
EV/Free Cash Flow : Or each dollar of FCF?

For more information on evaluating valuation multiples similar to this, please see our original white paper research : Making Sense Of Valuation Multiples.

Formula

EV / Earnings = Enterprise Value / Net Income

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