Multiple Definitions

Q What are stock "multiples"? — K.B., Sioux Falls, S.D.

A Multiple" is just a fancy term for the price-to-earnings ratio (or P/E). In general, a multiple is simply the result of dividing a stock's price by something, such as earnings (via the P/E ratio) or revenues (via a price-to-sales ratio). Imagine Scruffy's Chicken Shack (ticker: BUKBUK), a company trading at $40 per share. It's expected to earn $2 per share this year, so its P/E on this year's earnings is 20 (40 divided by 2 equals 20). You might refer to it as trading at an earnings multiple of 20.

If you read analyses of various companies, you'll see references to price-to-sales multiples, book-value multiples, cash-flow multiples and more. It's instructive to compare a company's various multiples with those of its peers, to see whether its stock appears to be undervalued or overvalued.

Q At an annual shareholder meeting, a "poison pill" strategy was mentioned. What's that?

— C.B., Monticello, Minn.

A Companies sometimes employ a poison-pill strategy to avoid being taken over. In one of two main formats, shareholders (but not a would-be acquirer) are permitted to buy more shares of company stock at a discount. This dilutes the value of the stock, including those shares held by the acquirer, making a buyout more difficult and expensive to pull off. Another poison-pill tactic is to permit shareholders to buy the wouldbe acquirer's stock at a discount in the event of a merger.

Shareholders have sometimes protested poison pills because they dilute the voting power of shares and because occasionally a takeover would actually be good for the company and shareholders. Some companies with poisonpill plans have gotten rid of them.

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