CFI Financial Modeling and Valuation Analyst (FMVA) Practice Exam

Multiples show the price per unit of earnings. In the building multiples grid, as earnings grow, the same price implies a smaller price-per-dollar-of-earnings, so the multiple falls. For example, with a price of 100, P/E goes from 100/5 = 20x to 100/8 = 12.5x as earnings rise from 5 to 8. This reflects the idea that growth is already embedded in price, so the incremental earnings justify a lower multiple. While multiples can stay constant or rise if prices jump faster than earnings, the common pattern in the grid is downward as earnings increase.