During our April Monthly Meeting, we received a great question from one of our Investing Club members: How do you value stocks using the "multiples approach." While Jim Cramer provided some key insights, the topic is so important we wanted to circle back with a more detailed explanation and stock example to further clarify the concept of multiples for Investing Club members.
The multiples approach is based on a simple idea: Similar types of businesses sell at similar prices. Applying the approach is also straightforward. Choose a financial metric and apply an appropriate multiple to determine a price target.