Multiples Valuation
IntermediateMultiples valuation is a method of valuing a company by applying a ratio, such as price-to-earnings or EV/EBITDA, taken from similar companies or transactions to the company's own financial figures.
A valuation multiple relates a measure of value, such as share price or enterprise value, to a financial measure, such as earnings, revenue or EBITDA. If similar companies are valued at 15 times earnings, a company with earnings of 10 million might be valued at about 150 million.
There are two main families of multiples. Equity value multiples, such as price-to-earnings and price-to-book, relate the value of shares to measures that belong to shareholders. Enterprise value multiples, such as EV/EBITDA and EV/Revenue, relate the value of the whole business to measures that belong to all funders.
Multiples are taken either from comparable listed companies or from prices paid in similar acquisitions.
The appeal of multiples is speed and simplicity, and they reflect how markets actually price businesses. The drawbacks are that finding truly comparable companies is difficult and that multiples do not explain why a company deserves a particular value. Differences in growth, profitability, risk and accounting can make simple comparisons misleading, so multiples are usually used alongside discounted cash flow analysis.
For worked examples and full lessons, visit notesbysara.org.