In the building multiples grid, multiples tend to what as earnings grow?

In the building multiples grid, multiples tend to what as earnings grow?

• A. Multiples rise as earnings grow
• B. Multiples stay constant
• C. Multiples vary unpredictably
• D. Multiples fall as earnings grow

Answer: (D)

Multiples show the price per unit of earnings. In the building multiples grid, as earnings grow, the same price implies a smaller price-per-dollar-of-earnings, so the multiple falls. For example, with a price of 100, P/E goes from 100/5 = 20x to 100/8 = 12.5x as earnings rise from 5 to 8. This reflects the idea that growth is already embedded in price, so the incremental earnings justify a lower multiple. While multiples can stay constant or rise if prices jump faster than earnings, the common pattern in the grid is downward as earnings increase.

Multiples show the price per unit of earnings. In the building multiples grid, as earnings grow, the same price implies a smaller price-per-dollar-of-earnings, so the multiple falls. For example, with a price of 100, P/E goes from 100/5 = 20x to 100/8 = 12.5x as earnings rise from 5 to 8. This reflects the idea that growth is already embedded in price, so the incremental earnings justify a lower multiple. While multiples can stay constant or rise if prices jump faster than earnings, the common pattern in the grid is downward as earnings increase.