What Is an Earnings Multiplier? Guide for Australian Investors 2025

Whether you’re picking stocks for your super, running a business, or simply curious about how companies are valued, you’ve probably heard the term earnings multiplier. In Australia’s fast-evolving financial landscape, understanding this key valuation tool is more important than ever—especially with the market shifts and regulatory tweaks rolling out in 2025.

What Is an Earnings Multiplier?

The earnings multiplier is a financial ratio used to value a company by comparing its share price to its earnings per share (EPS). It’s also known as the price-to-earnings ratio (P/E ratio). Essentially, it tells investors how much they’re paying for every dollar of a company’s earnings. A high multiplier suggests that the market expects strong future growth, while a low one may signal undervaluation—or underlying risks.

Here’s the basic formula:

• Earnings Multiplier (P/E) = Share Price / Earnings per Share (EPS)

Let’s break that down. If a company’s shares trade at $30 and its EPS is $2, the earnings multiplier is 15. In other words, investors are willing to pay $15 for every $1 the company earned over the past year.

Why the Earnings Multiplier Is Front and Centre in 2025

The P/E ratio has always been a staple for investors, but its significance has grown in 2025 for several reasons:

• Market Volatility: With the ASX experiencing higher swings due to global uncertainty and domestic policy changes, investors are scrutinising valuations more closely.

• Regulatory Updates: The Australian Securities and Investments Commission (ASIC) has tightened disclosure standards, making company earnings reports more transparent and reliable for calculating multipliers.

• Sustainable Investing: As environmental, social, and governance (ESG) criteria become standard, some analysts are adjusting earnings multipliers to reflect ‘green premiums’ for sustainable companies.

For instance, in early 2025, new Treasury guidance clarified how companies should report one-off pandemic recovery costs, leading to cleaner earnings figures and, by extension, more accurate multipliers.

How Investors Use Earnings Multipliers: A Practical Example

Let’s say you’re weighing up two Aussie tech stocks:

• Company A: Share price $40, EPS $4, P/E = 10

• Company B: Share price $120, EPS $6, P/E = 20

At first glance, Company B is more expensive relative to its earnings. But a higher multiplier might be justified if Company B is growing rapidly or has a competitive edge. Conversely, if Company A’s lower multiplier is below the sector average, it could be undervalued—or facing headwinds.

Australian fund managers increasingly compare multipliers across sectors and global markets. For example, as of May 2025, the average P/E on the ASX 200 sits around 16, but tech stocks average closer to 28, reflecting expectations for higher growth despite recent rate hikes by the Reserve Bank of Australia (RBA).

What Are the Limitations?

No valuation metric is perfect. Here’s what to watch for with earnings multipliers:

• One-off Events: Extraordinary gains or losses can skew EPS, making the multiplier misleading if you don’t adjust for them.

• Sector Differences: Some industries (like banks or utilities) naturally have lower multipliers, while tech and biotech tend to be higher.

• Growth vs. Value: A high multiplier isn’t always bad—sometimes it signals confidence in future earnings, not just overvaluation.

In 2025, with more companies reporting ‘normalised’ earnings, it’s easier to spot these issues—but investors should always dig deeper than a single number.

Key Takeaways for Australian Investors

• The earnings multiplier is a quick, powerful way to compare company valuations—but context is everything.

• Regulatory and reporting changes in 2025 mean cleaner, more useful earnings data for Aussie investors.

• Use the multiplier alongside other indicators like dividend yield, debt ratios, and sector trends for a fuller picture.