What is an Earnings Multiplier?

The earnings multiplier is more commonly known as the P/E ratio (price/earnings ratio).

By putting the price of a stock over the earnings per share, you have a proportion that can be compared across various securities with different price points. It may be common for a company in one industry to have a different-size P/E than another, but comparing a company to its peers will prove helpful.

Analysts use the P/E ratio to determine whether a stock is overpriced or underpriced, and the same goes for the market as a whole. When the average P/E for all of the stocks in an index is found and compared to historical levels, investors can get clues about whether the current price can be supported for long by fundamentals.

There are things that earnings does not cover, of course, and the markets have periods of inflation just like currency, so it may not mean that a crash is looming if the market earnings multiplier is high. This indicates overpriced or overbought conditions.

A low P/E might indicated oversold conditions, which would be a buying opportunity.