Various Multiples Used in Company Valuation: Valuation multiples are financial calculation instruments that compare different businesses by evaluating one financial statistic as a ratio to another. Multiples are the ratios of one financial statistic (for example, share price) to another (i.e., Earnings per Share). It’s a simple way to figure out a company’s worth and compare it to other companies.
Various Multiples Used in Company Valuation
BEST INDUSTRY PRACTICES
Understanding the concept of a valuation multiple, which is a prevalent valuation method, particularly for private companies, is critical to understanding company valuation.
A valuation multiple can evaluate a company’s worth using various performance metrics. Various Multiples Used in Company Valuation are
- Industry-specific variables
1. EQUITY MULTIPLES
Equity multiples are used in investment decisions, particularly when investors are looking to buy minor stakes in companies. Some common equity multiples used in valuation analysis are listed below.
- Price Earnings Ratio – is the most widely used equity multiple; input data is readily available; calculated as the ratio of Share Price to Earnings per Share (EPS).
- Price/Book Ratio – is helpful if assets drive profits rather than anything else; calculated as the ratio of share price to book value per share.
- Dividend Yield – is a metric that is used to compare cash returns and investment forms. It is calculated as the ratio of Dividend per Share to Share Price.
- Price/Sales – used by businesses that lose money; simple estimates; calculated as the ratio of share price to revenue per share.
A financial analyst must consider that businesses have different levels of debt, which affects equity multiples.
2. ENTERPRISE VALUE (EV) MULTIPLES
Enterprise value multiples are the most suitable multiples to use when assessing a merger and acquisition because they reduce the impact of debt financing. Some common enterprise value multiples used in valuation analysis are mentioned below.
- Enterprise Value to Revenue Multiple – is a valuation multiple that divides the enterprise value (equity plus debt minus cash) by annual revenue to determine the value of a company. For early-stage or high-growth companies that do not yet have positive profits, the EV to sales multiple is widely used. It is slightly influenced by accounting differences, calculated as the ratio of Enterprise Value to Sales or Revenue.
- EV/EBITDA multiple – ratio compares a company’s Enterprise Value (EV) to its Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) (EBITDA). The EV/EBITDA ratio is a standard metric for comparing the relative worth of different businesses.
- EV/Invested Capital – is a ratio of Enterprise Value to Invested Capital used in capital-intensive industries.
- EV/EBITDAR – is an Enterprise Value to its Earnings Before Interest, Taxes, Depreciation, Amortization, and Lease Rentals (EBITDAR) used in the airlines’ industry.
DIFFERENT METHODS OF VALUATION MULTIPLES
There are two techniques for performing multiples analysis.
Comparable Company Analysis: is used to examine public corporations. These businesses are comparable to the highly regarded firm. For each organization, an analyst will gather information. Share values, market capitalization, capital structure, sales, EBITDA, and earnings are all included.
Precedent M&A Transactions: examines previous industry mergers and acquisitions (M&A). Investors will use it as a benchmark for the company’s worth.
The quickest way to determine a company’s worth is to use valuation multiples. This will assist the team in responding to the following questions:
- What is the current value of our company?
- What changes need in the business to improve its value?
- What is a reasonable price for another company?
- What is the relationship between current valuations and historical periods?