Price/earnings valuation
The P/E multiple relates equity market value to earnings after relevant finance costs, tax and preference claims. Use maintainable earnings consistent with the multiple, adjusting unusual items where justified. A comparable company's multiple may need adjustment for growth, risk, business mix, control and marketability; it is not automatically transferable. P/E is different from an enterprise-value multiple applied to operating earnings. Negative or unstable earnings can make the measure unhelpful. A valuation is only as credible as the normalised earnings and comparability assumptions.
Worked example
Maintainable earnings attributable to ordinary shareholders are $600,000. An appropriately supported P/E of 8 gives estimated equity value $4.8 million. Do not deduct ordinary debt again if the earnings and multiple already represent equity value after financing costs.
Common mistake
Applying an equity P/E to operating profit before interest, or automatically using a listed comparator's multiple for an illiquid private business.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | AFM | Direct | September 2026–June 2027 |
| ACCA | FM | Direct | September 2026–June 2027 |