market multiple valuations method

Market Multiple Valuation Method and Valuation Mismatch

Market Multiples

The Market multiples approach is a comparative analysis method that seeks to value similar companies using the same financial metrics. The companies must be similar for a comparison of multiples to be meaningful. We can’t compare companies of vastly different sizes in different industries.

  • Price-Earnings Ratio–Discount or Capitalization Rate is the inverse of the PE ratio
  • Price/Cash Flow
  • Price/Revenue
  • Dividend/Price
  • Price/Book
  • Earnings Per Share

In using market multiple, one needs to understand the difference between EV (Enterprise Value) and EV (Equity Value). In short: The the definitions of Equity Value and Enterprise Value:

• Equity Value = Value of Core-Business Assets + Value of Non-Core-Business Assets

 • Enterprise Value = Value of Core-Business Assets

• Equity Value = Value to Equity Investors

• Enterprise Value = Value to Equity Investors + Value to Debt Investors + Value to Preferred Investors (and possibly others)

Equity Value includes the value of core-business Assets plus non-core-business Assets, but only to common shareholders, so Equity Value increases. It increases not just because Cash is a non-core-business Asset, but also because the increase was attributed to Equity on the Balance Sheet. Enterprise Value includes only core-business Assets, but to all investors. This Cash is not a core business Asset, and it also doesn’t represent any investor group outside of equity investors. Therefore, Enterprise Value stays the same. Any multiples based on Enterprise Value, such as EV / Revenue, EV / EBITDA, and EV / EBIT, also stay the same. The P / E multiple will increase because the numerator – Equity Value – increases, but the denominator stays the same.

Valuation Mismatches

Market Multiple Valuation Method and Valuation Mismatch

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