Question

Why do market analysts employ price multiples (e.g., price/earnings, price/book, etc.) in their valuation work? Besides the obvious, what does a price/earnings multiple of 18 versus a price/earnings multiple of 10 financially suggest? What does a price/book of 3 suggest? Conceptually, would you ever purchase a stock with a price/book of 3?

Answer 1

Market analysts employ price multiples (e.g., price/earnings, price/book, etc.) in their valuation work to compare with similar companies or similar benchmarked industries. By comparing it with other companies they can identify whether a stock is overpriced or under priced.
P/E ratio of 18 over P/E ratio of 10 indicate the earlier stocks highly overpriced . It indicated the price per share is trading 18 times earning per share. Usually these are lagging indicator and not leading indicator . Else P/E of 18 would be fair value.
P/B ratio the price per share to total value of assets per share. P/B =3 indicates that the share price is trading 3 times the asset value.
No fundamentally one should not purchase at P/B of 3 because in case of bankruptcy or liquidation equity holders will receive nothing.