Earnings multiplier model

P0/E1 - based on expected earnings, leading P/E ratio
P0/E0 - trailing P/E ratio

Leading P/E = Trailing P/E x[ 1/(1+g)]

Given the growth rate is constant, use DDM to determine P/E ratio as:
P0/E1 = (D1/E1) / (k - g)

P0= D1 / (k - g)
E1 = (1+g) E0
ROE = (net income /sales) (Sales / total assets) (total assets / equity)

P/E ratio increase if
· Increase dividend payout D1/E1
· Increase growth rate g
· Decrease k
· Increase ROE, g=ROE x retention ratio

Problem of using P/E analysis
· Earnings are based on historical caosst and with different quality
· Business cycle
· The model cannot be used if k is smaller than g