What is the relationship between a capitalization rate and a P/E multiple?
The reciprocal of the P/E ratio is called the “earnings yield” in the stock world, the “current yield” in the bond world and is akin to the “capitalization rate” in the real estate world. The reciprocal key on the HP-12 financial calculator is identified by a white “1/x” button. Enter the P/E ratio on the HP-12, push the “1/x” key and, voila, you get something similar to a capitalization rate. For example, a 15 P/E ratio equals a 6.667 percent “capitalization rate.” A better comparative ratio for the real estate analyst, however, is the relationship of price to EBITDA. Not surprisingly, this is known as P/EBITDA. It is a superior analogy to the P/E ratio’s reciprocal, because it excludes interest, corporate taxes, depreciation and amortization, just like the real estate concept of “net operating income” (NOI). Further complicating the matter is an earnings concept known as “FFO,” which is used in the world of REITS. The initials stand for “funds from operations” and it is equal to a RE
The reciprocal of the P/E ratio is called the “earnings yield” in the stock world, the “current yield” in the bond world and is akin to the “capitalization rate” in the real estate world. The reciprocal key on the HP-12 financial calculator is identified by a white “1/x” button. Enter the P/E ratio on the HP-12, push the “1/x” key and, voila, you get something similar to a capitalization rate. For example, a 15 P/E multiple equals a 6.667 percent “capitalization rate.” A better comparative ratio for the real estate analyst, however, is the relationship of price to EBITDA. Not surprisingly, this is known as P/EBITDA multiple. It is a superior analogy to the P/E ratio’s reciprocal, because it excludes interest, corporate taxes, depreciation and amortization, just like the real estate concept of “net operating income” (NOI). There is another earnings concept known as “FFO,” which is used in the world of REITS. The initials stand for “funds from operations” and it is equal to a REIT’s net
