Stock Market Investment Partner has been recommending that you do your own detailed research when selecting stocks. While we still believe that this is a very good idea, we can't blindly pretend that every single investor does it. Some investors prefer looking at market multiples like the price earings ratio. Hence, using market multiples must not be rejected, and here are the two main reasons why:
- Price earnings (P/E), price to book (P/B), price to sales (P/S) and other market multiples are very simple and available. Using them as a part of stock analysis is less complicated and faster than doing a discounted cash flow model (DCF) for example. Market multiples provide a quick overview of the valuation of a stock and can quickly guide investment decisions.
- Market multiples often are self-fulfilling prophecies. Indeed, since they are so simple to find and to use, lots of investors use them. Since lots of people use them, others don't have a choice to use them also because they feel that multiples now explain (at least part of) market valuations. A chain reaction is created and the majority ends up using them.
For those two reasons, multiples become relevant for stock market investment analysis and should be combined with more complete research.
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