What is selling at a 90 Multiple in stocks?

Question

I don't understand this terminology...

Fuel Tech (FTEK - Ticker): "I believe in this company, but I cannot get behind a company that sells at a 90 multiple. In other words, Don'tBuyDon'tBuy."

Answer 1

The person saying this is that the company is trading a price to earnings multiple of 90. In more clear terms,that means that value of the company is 90 times what it earns in the given year.

Why does this matter? The "average" company in the market trades at about a 17 multiple. This is what has been deemed a fair value to speculate on future ability to return money to shareholders (simplisticly think of it as 17 years of future earnings). Trading at a 90 multiple means even if the company does very well in the future and the multiple shrinks that the market has already given it credit for success. The stock may not increase in value.

Answer 2

The multiple in the quote is the P/E multiple. The Price/Earnings ratio allows you to compare companies with different stock prices to see which one is relatively more expensive or less expensive. The ratio tells you how much you would have to pay for each dollar that the company earns. In this case a single dollar of earnings costs $90 at the current stock price.

There are many multiples, P/BV, P/S...but they basically do the same thing, standardize price by some other factor to allow for comparisons.