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Valuation Multiples - Course Notes

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13 views7 pages

Valuation Multiples - Course Notes

Uploaded by

ngocanh1612004
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Multiples Valuation: Course Notes

How to value a company using relative valuation


Multiples valuation: The process
How to perform multiples valuation in practice

1 2 3
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?

4 5
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

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