Relative Valuation Multiples¶
One-line definition¶
Pricing a stock relative to a fundamental (earnings, book value) instead of discounting cash flows directly — faster than a DDM, but only as sound as the peer group and growth assumptions behind it.
Formula¶
Justified (fundamental) P/E from Gordon growth:
P/E = payout_ratio / (r - g)
PEG: PEG = PE / expected_growth_% (growth expressed in percentage
points, e.g. pass 15 for 15% growth, not 0.15)
Why PMs care¶
Multiples are the fastest way to screen a universe and to sanity-check a DDM output. Dividing the Gordon-growth DDM formula through by earnings-per-share turns it directly into the justified-P/E formula above, so "cheap on P/E" and "high DDM value relative to price" are the same claim viewed two different ways.
Common mistakes¶
- comparing P/E across companies with very different growth or payout without adjusting for it — PEG is a partial fix, not a complete one
- treating a low multiple as automatically cheap rather than checking whether it's cheap for a reason (declining growth, higher risk, overleveraged balance sheet)
Limitations¶
justified_pe and peg_ratio in src/pm/equity/valuation.py only cover
the P/E family. Multiples that need balance-sheet or enterprise-value
inputs beyond price/dividends/earnings — EV/EBITDA, P/B, P/S — aren't
implemented here.