Price-Earnings Ratio
Price-Earnings Ratio or P/E Ratio in publicly-traded stocks is a company valuation ratio in which a company’s earnings-per-share are divided into its stock price-per-share.
For example, if a company’s stock is trading at $20 a share and its annual earnings are $2 per share, the P/E ratio for the stock is 10. Therefore, the company is valued at 10 times its earnings. P/E ratios increase with increasing levels of confidence investors have in the company’s future earnings prospects.
What does this have to do with buying and selling websites? Well, websites are often sold at a multiple of earnings/profits. So as in stocks, the P/E ratio represents that earnings multiple. It provides an easy way to quickly assess if a website is priced competitively with other comparable websites currently available in the marketplace. Generally, the more established (or aged) the website, the more confidence buyers have in the website’s future earnings prospects, and thus the higher the earnings multiple.
Of course, P/E ratios for stocks are significantly higher than for websites because stocks are liquid assets that are easily traded and include operating businesses and other assets included in their valuations. Websites are not liquid assets and require time to sell to buyers.
In websites, this earnings multiple does not take into account any additional assets that may be included in the sale like inventory, premium domain name, patents, etc. These assets would add to the website valuation and sale price.
Author: Kris Tabetando
Kris Tabetando provides mergers & acquisitions (M&A) advisory and brokerage services to Internet companies. He also partners with investors to acquire & manage Internet businesses.
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