Which multiple is best suited for banks and financial institutions?

The price-to-earnings (P/E) ratio is particularly well-suited for banks and financial institutions due to the nature of their earnings and the significance of net income in assessing their profitability. In the banking sector, net income is a critical metric, as it reflects the core operations and profitability of a financial institution after accounting for interest income, fees, and various expenses.

For banks, which often have complex capital structures and varying revenue streams, P/E provides a straightforward valuation metric that relates the market price of a company's stock to its earnings per share. This is especially relevant for financial institutions as their earnings are directly tied to shareholder value, making it a key performance indicator for investors.

Additionally, banks frequently deal with significant regulatory requirements that impact their earnings, making a focus on net earnings—reflected in the P/E ratio—more relevant than other multiples that may center on enterprise value or cash flow metrics. Consequently, while other multiples, such as EV/EBIT or EV/EBITDA, can be useful in certain contexts, they do not capture the nuances of earnings in the financial sector as effectively as the P/E ratio.