Common examples are the price-to-earnings ratio, the price-to-sales ratio and enterprise value to EBITDA. A company worth 1 billion dollars with 50 million dollars in earnings trades at 20 times earnings. Multiples turn a price into a number that can be compared across companies and across time.
They are a quick way to judge whether a stock looks cheap or expensive relative to peers or to its own history. Faster-growing companies usually trade at higher multiples, because investors pay for expected future growth.
A multiple does not give the full story. A low multiple can reflect real problems, and a high one may be justified by strong growth. Different accounting methods, one-time items and the choice of earnings figure can make comparisons misleading.
Compare companies in the same industry, use more than one multiple, and consider growth, margins, debt and risk alongside the number.