Definition
Multiple expansion occurs when the market assigns a higher P/E, EV/EBITDA, or other multiple to a company, often driven by improved growth expectations, sector rotation, or declining interest rates. In private equity, the combination of earnings growth and multiple expansion is the primary return driver. Conversely, multiple compression reduces valuations.
functions Formula
Return ≈ Earnings Growth + Multiple Change + Dividend Yield
lightbulb Example
Buy at 10x P/E with $5 EPS. In 3 years, EPS grows to $7 and P/E expands to 14x. Stock goes from $50 to $98—a 96% return where 40% came from earnings growth and 56% from multiple expansion.
verified_user Key Points
- Powerful return driver in private equity
- Often driven by improved growth narrative
- Can reverse quickly (multiple compression)
- Rising interest rates generally cause multiple compression