Multiple

A multiple is a simple division. You divide the price of a company by a figure from its business, for example by annual profit. If a company costs 100 million euros and earns 10 million a year, the multiple is 10. One then says: The company is valued at ten times its profit. In the same way, you can divide the price by revenue, meaning everything the company takes in during a year. The purpose is always the same: to make a large and a small company comparable.

Why a price tag of 100 million euros says nothing at all

The plain price of a company is a useless piece of information. A corporation worth 50 billion euros can be cheap, a start-up worth 20 million can be wildly overpriced. Only the relation to actual earnings turns it into a meaningful statement. That is why analysts almost never talk about absolute prices, but about multiples.

Multiples are also the fastest way to compare companies within the same industry. If three software makers are valued at five times revenue and a fourth at fifteen times, that immediately stands out. Either the market expects much stronger growth from that company. Or it is simply too expensive. The number supplies the question, not the answer.

Multiples come up especially often in tech coverage because many AI companies are not yet profitable. Where there is no profit, you cannot divide by it either. So people fall back on revenue instead. This is exactly why you constantly hear sentences like “valued at forty times revenue” when it comes to AI start-ups.

The calculation behind the number

At the top of the calculation is the price. For publicly traded companies, this is usually the market capitalization, meaning the share price multiplied by the total number of shares. For non-listed companies, it is the valuation from the most recent funding round, i.e. the price investors last paid. At the bottom is the business figure used as the divisor.

The best-known multiple is the price-earnings ratio, abbreviated P/E ratio. It divides the share price by earnings per share. A P/E of 25 means, roughly speaking: assuming profit stays constant, it takes 25 years for the company to earn back its purchase price. There is also the revenue multiple and metrics calculated before interest and taxes, in order to make countries and financing structures comparable.

It matters whether the calculation uses past or expected figures. If you take last year’s profit, it’s called a historical multiple. If you take the estimate for next year, it’s a forward multiple. Growing companies look considerably cheaper when future figures are used. So anyone comparing two multiples must check whether both are based on the same footing.

Multiples in headlines about AI companies

When the news reports that an AI company has been valued at 30 billion dollars, it is almost always followed by the note that this corresponds to thirty times expected revenue. That addition is exactly the multiple. It is the reason why some observers speak of a bubble. Traditional software companies were valued, for years, at more like five to ten times revenue.

Multiples are also the standard yardstick in company acquisitions. Buyers look at what multiple comparable companies last changed hands for. From that, they derive their own offer. Banks use the same method when preparing an IPO and need to set an issue price.

A common misconception is that a low multiple automatically means a bargain. Often it is a warning sign, because the market expects shrinking revenues. Conversely, a high multiple can be justified if a company doubles its revenue every year. A multiple is therefore not a verdict, but a condensed expectation about the future.