What are the most common multiples used in valuation?
In valuation practice, the most commonly used multiples are P/E, P/BV and EV/EBITDA.
The most common multiple used in the valuation of stocks is the price-to-earnings (P/E) multiple. Enterprise value (EV) is a popular performance metric used to calculate different types of multiples, such as the EV to earnings before interest and taxes (EBIT) multiple and the EV to sales multiple.
Using multiples in valuation analysis helps analysts make sound estimates when valuing companies. This is especially true when multiples are used appropriately because they provide valuable information about a company's financial status.
Method 1: Comparable Analysis (“Comps”)
Multiples of EBITDA are the most common valuation method. The “comps” valuation method provides an observable value for the business, based on what other comparable companies are currently worth.
P/E is the most popular valuation ratio used by investors. It is equal to a stock's market price divided by the earnings per share for the most recent four quarters.
A small business might use a multiplier between three and five. A large, public company typically uses a multiplier between seven and 12.
Valuation Multiples Formulas
EV/EBIT = Enterprise Value ÷ LTM EBIT. EV/EBITDA = Enterprise Value ÷ LTM EBITDA. P/E Ratio = Equity Value ÷ Net Income. PEG Ratio = P/E Ratio ÷ Expected EPS Growth Rate.
What is Multiples Analysis? The multiples analysis is a valuation technique that utilizes different financial metrics from comparable companies to value a target company. Thus, the assumption is that the relative value of certain financial ratios can be used to rank or value a company within a similar group.
Valuation methods typically fall into two main categories: absolute valuation and relative valuation.
- Discounted Cash Flow (DCF) Analysis.
- Multiples Method.
- Market Valuation.
- Comparable Transactions Method.
What are the 3 major valuation methods?
Three main types of valuation methods are commonly used for establishing the economic value of businesses: market, cost, and income; each method has advantages and drawbacks.
There are three approaches to valuing a company: the asset approach, income approach, and market approach.
An EV/EBITDA multiple of about 8x can be considered a very broad average for public companies in some industries, while in others, it could be higher or lower than that. For private companies, it will almost always be lower, often closer to around 4x.
The most commonly used rule of thumb is simply a percentage of the annual sales, or better yet, the last 12 months of sales/revenues.
Investors are choosing companies in this range usually fund startups growing at a rate of 30 – 40% per year. This is considered a high-range multiple. Such a high range is usually seen in companies growing at 300 – 400% per year.
Valuation ratios, sometimes called market value ratios, are measurements of how appropriately shares in a company are valued and what type of return an investor may get. By calculating the market value a potential investor can see if the shares are overvalued, undervalued, or at a fair price.
