Review: Profit Multiples

Review: Profit Multiples

Today I wish to review an investing term called the Profit Multiple. The profit multiple comes up when investors are deciding between two or more investments, where the net investment or the amount invested is the close to the same, but eventual profit can be much different due to the profit multiple. Let’s look at the math.

First Investment Candidate Steemleo Token Leo
First, calculate Return on investment
The math works like this:
You buy 10 units of Leo Token for $4.00 per unit.
Total investment $40.00.
If the price rises to $5.00 and you sell your return on investment is $5 - $4 = $1
Profit $1.00
Profit/Cost or roughly
1$/4$ or 25%.

Second, calculate the profit multiple.
Now a multiple is the ratio of profit per unit.
It starts with you getting your invested capitol back, which is a multiple of one. You invested $4 and got at least $4 dollars back, then anything over that is added to one. In the this Example your profit was 25%, so your multiple was 1 plus 0.25 or 1.25.
So the Profit Multiple on Leo is 1.25. So for every $1.00 dollar invested you expect to earn $ 1.25 dollar back.

Second Investment Candidate Steem

First, calculate Return on investment
The math works like this:
You buy 10 units of Stem Token for $3.75 per unit.
Total investment $37.5
If the price rises to $5.00 and you sell your return on investment is $5 - $3.75= $1.25
Profit $1.25
Profit/Cost or roughly
1.25$/3.75$ or 33%.

Second, calculate the profit multiple.
Now a multiple is the ratio of profit per unit.
It starts with you getting your invested capitol back, which is a multiple of one.
You invested $3.75 and got at least $3.75 dollars back, then anything over that is added to one.
In the this Example your profit was 33%, so your multiple was 1 plus 0.33 or 1.33
So the Profit Multiple on Steem is 1.33 to 1.00. For every dollar you invest you expect 1.33 dollars profit. That’s your Profit Multiple.

Now when we compare a profit multiple of 1.25 to one of 1.33, the difference between them is $ 0.08 seems small, but when we Multiple the difference by 10-100-1000 the difference becomes significant.
Multiple by ;
Ten it’s 0.80,
One hundred it’s $8.00 dollars.
One Thousand it’s $80.0. dollars.
Ten Thousand its $800.0. dollars.
So as you can see a dull topic gets exciting at the end when we start to realize that multiples can mean very significant amounts of money.

Summary:
Multiple is the ratio of profit per unit, which is an important term to understand when considering investing in a two items with similar cost basis rising to the same price or two items with different prices and different profit targets. In the first Example your profit was 25%, so your multiple was 1 plus 0.25 or 1.25. In the second Example your profit was 33%, so your multiple was 1 plus 0.33 or 1.33. I use Profit multiples to compare similar asset vehicles which have the same success risk parameters. Profit multiples get much more exciting if we talk about profit multiple in items of assets with different cost basis and different target prices in a future article. In those cases discussions of multiples can get quite exciting. If you have questions or comments about your experiences please comment below.

✍🏼 By Shortsegments.

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