Definition
Multiple expansion occurs when investors become willing to pay more for each dollar of earnings or cash flow. This can happen due to improved growth expectations, lower interest rates, or increased market optimism. It amplifies returns when combined with earnings growth.
Formula
Return from Multiple Expansion = (New Multiple / Old Multiple - 1) × 100%
Example
A stock with $5 EPS trading at 15x P/E ($75) expands to 20x P/E ($100). The 33% price gain came entirely from multiple expansion, not earnings growth.
FAQ
What is Multiple Expansion?
When valuation multiples increase, boosting stock returns beyond earnings growth.
How do you calculate Multiple Expansion?
A common formula for Multiple Expansion is: Return from Multiple Expansion = (New Multiple / Old Multiple - 1) × 100%
Why is Multiple Expansion important?
Multiple Expansion helps investors evaluate valuation and make more informed decisions.