Stock Multiples: How to Tell When a Stock is Cheap/Expensive

In this episode of Plain Bagel, Richard Coffin explains how to use multiples, specifically the price-to-earnings (P/E) ratio, to gauge whether a stock is worth investing in. He details how to calculate trailing and forward P/E ratios, emphasizing that these multiples are relative measures that should be compared against a company's historical P/E ratios and its industry peers. While multiples can be a handy tool to quickly understand a stock's price level, Coffin warns against relying solely on them, as they don't account for factors like growth rate or potential deterioration of a company's fundamentals, which could lead to a value trap. He suggests focusing on understanding a company's operations and future prospects first, then using multiples to assess valuation.