Price Multiples Comparison of Companies

Investors often use price multiples as a quick way to evaluate the valuation of a company compared to its peers. One widely used multiple is the price-to-earnings (P/E) ratio, which measures a company’s current share price relative to its earnings per share (EPS). However, investors also consider other factors such as growth potential and industry dynamics when interpreting these multiples.

Suppose Company Alpha has a P/E ratio of 15, while Company Beta—operating in the same sector—has a P/E ratio of 20. If both companies are expected to grow earnings at a rate of 10% per year over the next five years, which conclusion can be drawn regarding their relative valuations?