Earnings multiples aren't driven by growth alone

A high earnings multiple is commonly used to classify a stock as a growth stock (just look at what Jim Cramer from Mad Money writes). Growth is not the whole story. By looking at the key value driver formula, we can see that the earnings multiple is determined by growth and the return on invested capital (ROIC). Divide both sides of the formula with the net operating profit less adjusted taxes (NOPLAT) to get the earnings multiple.

• Value = (NOPLAT(1-g/ROIC))/(WACC-g)
• Divide both sides with NOPLAT
• Value/NOPLAT = (1-g/ROIC)/(WACC-g)
• As we can see, the earnings multiple on the left is a function of both growth and ROIC