Multiples Valuation: Course Notes
How to value a company using relative valuation
Multiples valuation: The process
How to perform multiples valuation in practice
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Select a multiple Find a peer group Clean financials
Is it a transactional or a trading Are there any one-off or non-
Are the companies in the peer group
multiple? operating items in the P&L/Balance
a suitable comparator?
Is it an EV or Equity multiple? sheets of peer group?
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Calculate the multiple Multiply by the comparator
and obtain EV or Equity
For ex. If you have calculated EV /
Calculate the multiple after adjusting
EBITDA, multiply by the target’s
peer group financials
EBITDA and obtain EV
Why multiples?
The advantages of using valuation multiples
Viable alternative
to DCF
Incorporate
Acquisition Triangulate results
Premium Multiples
Valuation
Easy to Update Market sentiment
Easy to
communicate
Transaction vs. Trading multiples
Comparison between transaction and trading multiples
Type of Transaction Trading
Multiple Multiples Multiples
• A multiple observed in an • A multiple based on the stock
Description
M&A deal price of a listed firm
• Includes premium • Current
Pros • Shows the value of the • Large universe of
entire firm comparable firms
• Difficult to find suitable • Does not include
transactions premium
Cons
• Figures are not always • Assumes market
disclosed pricing is perfect
Timing • Not always up-to-date • Easy to update
Enterprise Value vs. Equity Multiples
Comparison between multiples based on a firm’s enterprise value and equity-based multiples
Type of Enterprise Equity
Multiple Value Value
• Debt and equity • Equity holders
Relevant for
holders
Can be
• EBITDA, Sales, EBIT • Net Income
compared to
Cannot be
• Net Income • EBITDA, Sales, EBIT
compared to
Advantages
• Approximates cash • Easier to calculate
• One-off events not considered • Shows owners’ perspective
• EV / EBITDA
Popular examples • EV / EBIT • Price / Earnings
• EV / Sales
Popular Multiples
Examples of multiples used by practitioners
Multiple Why use it? Why not? Popularity
• Easy to apply • Depends on capital
structure
Price / Earnings Very popular
• Represents shareholders • Easily influenced by one-
view off events
• Considers profitability • Does not consider items
that are below EBITDA
EV / EBITDA Very popular
• Not influenced by capital • Difficult to apply
structure
• Can be applied in all situations • Does not consider
(revenues cannot be negative) profitability
Narrow
EV / Sales • Not influenced by capital Application
structure
• Good proxy for future • Does not consider
Sector Specific
potential profitability Narrow
(number of users,
Application
MW installed, etc.) • Comparable across the
entire industry
How do we select the right peer group?
A relative valuation is only as good as the quality of the peer group selected
When selecting peer group, we should look for
Same companies that are similar in terms of:
industry Size
Profitability
Similar
Similar
growth Growth
size
perspectives
Geography of operations
Business Segment
Find 6 or 7 companies that are similar Opportunities
enough to the Target firm
Solid list of
comparable firms