Simple Ratios (Multiples) Model (Retired)¶

Retired Model

Simple Ratios has been removed from the dashboard as of March 2026 (broken implementation). This page is kept for reference. See active models.

Quick valuation using market multiples - the fastest and most widely used method for ballpark estimates.

Overview¶

The multiples approach values companies by comparing them to similar companies or industry averages using simple ratios. It's the go-to method for quick assessments and sanity checks.

Core Multiples¶

1. Price-to-Earnings (P/E)¶

Formula:

Fair Value = Earnings × Industry_PE_Ratio

Best For: - Mature, profitable companies - Stable earnings - Cross-industry comparisons

Limitations: - Useless for unprofitable companies - Distorted by one-time items - Accounting policy differences

2. Price-to-Book (P/B)¶

Formula:

Fair Value = Book Value per Share × Industry_PB_Ratio

Best For: - Asset-heavy businesses - Financial institutions (banks, insurance) - Distressed situations

Limitations: - Ignores intangible assets - Historical cost vs market value - Less relevant for service/tech companies

3. Price-to-Sales (P/S)¶

Formula:

Fair Value = Revenue per Share × Industry_PS_Ratio

Best For: - Unprofitable growth companies - Early-stage businesses - Revenue quality assessment

Limitations: - Ignores profitability - Margins vary widely - Can justify overvaluations

4. EV/EBITDA¶

Formula:

Enterprise Value = EBITDA × Industry_EV/EBITDA_Ratio

Best For: - Capital-intensive businesses - Comparing across capital structures - M&A valuations

Limitations: - Ignores CapEx requirements - EBITDA isn't cash flow - Adjustments for non-recurring items

How It Works¶

1. Industry Benchmark Selection¶

Sector Averages: - Technology: High P/E (20-30x), high P/S (5-10x) - Utilities: Low P/E (12-18x), high dividend yield - Financial: Low P/B (0.8-1.5x), moderate P/E - Consumer Staples: Moderate P/E (15-25x), stable margins

2. Peer Comparison¶

Choose comparable companies by: - Same industry/sector - Similar size (market cap) - Similar growth profile - Similar profitability

3. Multiple Application¶

# Example: P/E multiple
sector_median_pe = 20.0
company_eps = 5.00
fair_value = company_eps * sector_median_pe  # $100

4. Quality Adjustments¶

Adjust for: - Growth: Higher growth → higher multiple - Profitability: Higher margins → premium - Risk: Higher debt → discount - Quality: Better ROIC → premium

Model Implementation¶

Coverage¶

Success Rate: ~99% (almost always has at least one ratio)
Data Required: Current financials only
Speed: Fastest valuation method

Averaging Strategy¶

Use median of available ratios:

ratios = [pe_value, pb_value, ps_value, ev_ebitda_value]
fair_value = median([r for r in ratios if r is not None])

When Simple Ratios Work Best¶

Ideal Use Cases¶

Quick screening: Initial pass on hundreds of stocks
Sanity check: Validate DCF/other models
Relative value: "Cheaper than peers?"
Market sentiment: How market prices sector

Complementary Use¶

Use with DCF for different perspectives
Cross-validate with GBM rankings
Combine multiple ratios for robustness

Limitations¶

1. Backward-Looking¶

Ratios use historical earnings/book value, not future expectations

2. Ignores Growth¶

Standard multiples don't account for growth rates (use PEG ratio as adjustment)

3. Accounting Differences¶

GAAP vs IFRS, conservative vs aggressive policies

4. Cyclical Distortion¶

Peak earnings → low P/E → looks cheap but isn't Trough earnings → high P/E → looks expensive but isn't

5. No Absolute Anchor¶

Entire market can be overvalued/undervalued

Advanced Adjustments¶

PEG Ratio¶

PEG = P/E / Growth_Rate
PEG < 1.0 = Potentially undervalued for growth
PEG > 2.0 = Potentially overvalued for growth

Normalized Earnings¶

Use average earnings over cycle instead of current year

Forward Multiples¶

Use next year's estimates instead of trailing

Sector-Specific Guidelines¶

Sector	Primary Multiple	Typical Range	Notes
Technology	P/S, P/E	5-15x Sales	High growth, often unprofitable early
Financial	P/B, P/E	0.8-1.5x Book	Book value is meaningful
Healthcare	P/E, EV/EBITDA	15-25x Earnings	R&D heavy, binary outcomes
Utilities	Dividend Yield, P/E	3-5% Yield	Stable, regulated
Consumer Staples	P/E, EV/EBITDA	18-25x Earnings	Stable, branded
Energy	EV/EBITDA, P/CF	5-8x EBITDA	Cyclical, commodity-driven
Industrials	P/E, EV/EBITDA	12-20x Earnings	Capital intensive
Real Estate	P/FFO, Dividend Yield	12-18x FFO	Use FFO not earnings

Implementation Example¶

from invest.valuation.ratios_model import SimpleRatiosModel

# Initialize
ratios_model = SimpleRatiosModel()

# Calculate
result = ratios_model.calculate_fair_value(stock_data)

print(f"P/E Valuation: ${result['details']['pe_value']:.2f}")
print(f"P/B Valuation: ${result['details']['pb_value']:.2f}")
print(f"Consensus (Median): ${result['fair_value']:.2f}")

Combining with Other Models¶

Triangulation Approach: 1. Simple Ratios: Quick market-based view (\(100) 2. DCF: Intrinsic cash flow value (\)120) 3. GBM Ranking: Relative attractiveness (Top 20%)

If all agree → High confidence If diverge → Investigate assumptions

Academic Foundation¶

Core Research¶

Graham & Dodd (1934): "Security Analysis"
Foundational work on value investing and multiples
Damodaran (2002): "Investment Valuation"
Comprehensive treatment of relative valuation
Liu, Nissim & Thomas (2002): "Equity Valuation Using Multiples"
Empirical comparison of which multiples work best

Key Findings¶

Best Predictor: Forward P/E > Trailing P/E > P/B > P/S
Industry Matters: Multiples vary 3-5x across sectors
Earnings Quality: Accruals-adjusted earnings improve accuracy
Combination: Using multiple ratios beats single metric

When to Use¶

Primary Valuation¶

Initial screening of large universes
Quick comparative analysis
Market-relative opportunities

Secondary Check¶

Validate DCF assumptions
Reality check on growth expectations
Peer comparison

Avoid As Primary¶

High-growth unprofitable companies
Turnaround situations
Unique business models with no peers

References¶

Damodaran, A. (2002). Investment Valuation: Tools and Techniques. Wiley.
Graham, B., & Dodd, D. (1934). Security Analysis. McGraw-Hill.
Liu, J., Nissim, D., & Thomas, J. (2002). "Equity Valuation Using Multiples". Journal of Accounting Research.
Penman, S. (1998). "A Synthesis of Equity Valuation Techniques and the Terminal Value Calculation for the Dividend Discount Model". Review of Accounting Studies.