Hi everybody. In the previous class, we have learned how to value an office building by multiplying the size of the office building under consideration by the average price per square foot. By doing so, we can get a reasonable estimate of the building's value. We can apply this same idea to estimate startup value by replacing square footage with some more appropriate measure of the firm's scale. In company valuation, the most often used valuation multiples are PE ratio and PB ratio. There are other multiples, but you don't have to learn them for now. Instead, you can create one as you need it later once you understand how it works. In this course, I'm going to explain PE ratio, PB ratio and PS ratio. PE ratio is Price to Earnings Ratio. And it is equal to the share price divided by its earnings per share. Let's define earnings per share as EPS for short. That is PE ratio is equal to the share price divided by EPS. Intuition behind PE ratio is that when you buy a stock, you are in a sense buying the rights to the firm's future earnings. And you should be willing to pay proportionally more for a stock with higher current earnings. Therefore, we can estimate the value of a startup's share by multiplying its current earnings per share by the average PE ratio of comparable firms. Earnings per share means what the company earns per share of stock. It is computed by dividing earnings by the total number of shares the company issued. Especially earnings here is called net income. You're going to learn what that income means later. In the meantime, let's call it earnings. Suppose your startup is in IOT industry. And you find that the average PE ratio of IOT companies is 30. Let's also suppose that your startup's earnings per share is $1. Then a share of your startup is worth $30 per share, which is the product of PE ratio of 30 and EPS of $1. If your startup’s total earnings are $100,000, the company is worth $3 million, which is the product of PE ratio of 30 and earnings of $100,000. Using PE ratio is very easy and looks straight forward. Inverse of PE ratio is earnings divided by stock price. That is, return on investment, which is ROI for short. For example, earnings are $1 and stock price is $10. That return on investment is 10%. So, a PE ratio of 10 means return on investment of 10%. We can also calculate that PE ratio of 20 means ROI of 5%. PE ratio of 30 means that ROI of 3.3%. The PE ratio we just used is also called trailing PE ratio, using earnings over the prior twelve months. However, for valuation purpose, the PE market using is expected earnings over the next twelve months, is generally preferred. Because we are most concerned about future earnings, it is called forward PE ratio. In order to help you understand PE ratio, let's take a look at another example. Suppose airline company, Korean Air, has earnings per share of $2. If the average PE of comparable airline stocks is 20, you can estimate a value for Korean Air by using the PE as a valuation multiple. We estimate a share price for Korean Air by multiplying its EPS by the PE of comparable firms. Thus, price is equal to $2 times 20, equal to $40. Using PE ratio is easy, but it has a problem. What is PE ratio when earnings are negative? That is PE ratio is not useful when earnings are negative. Especially it is common that earnings are negative for most startups. When startups’ earnings are negative, you need alternative multiples to estimate the value of them. Next, we are going to learn those alternative multiples.