The net income multiple, also known as the earnings multiple, is a financial metric used to value a company based on its net income. It is calculated by dividing the market value of a company’s equity by its annual net income. For instance, if a company has a market capitalization of $100 million and net income of $10 million, its net income multiple would be 10.
The net income multiple is an important metric for investors because it provides a quick and easy way to compare the valuations of different companies. It is also used by companies to set their own stock prices and by analysts to make recommendations to investors. Historically, the net income multiple has been used for decades as a key indicator of a company’s financial health and valuation.