Multiples analysis for beginners – an introductory overview

What is market multiples valuation and how is it used?

In finance, market multiples valuation is a process where the current market value of a company is divided by a key metric to compare it with other similar companies. Some standard financials include comparing to sales or revenues (EV/Sales or EV/Revenue), earnings before interest, taxes, depreciation, and amortization (EV/EBITDA), earnings before interest and taxes (EV / EBIT), net income (P / E) or book value of equity (P / B).

This technique is used extensively in the equity markets by analysts, associates, managers, directors, partners and other valuation professionals to value companies, especially when comparable companies and niches are available to compare. When done correctly, market multiples valuation can be a powerful tool.

The market valuation of comparable companies can be determined from:

• Trading multiples of similar publicly traded companies
• Transaction multiples of similar companies in precedent M&A transactions

How do I determine the best comparables?

The first step in market multiples valuation is to find comparable companies. In trading multiples, this can be done by looking at companies in the same industry with similar business models that are publicly listed. You can find relevant listed companies powerfully using the platform. The companies chosen should be as similar as possible to the target to make the estimation as comparable as possible. Also, you can compare different peer groups, such as geographies, and industry verticals/niches, to understand which close segments have the highest valuation drivers if you want to position an asset as attractively as possible when approaching a potential asset sale. With transaction multiples, you would need access to an external database of M&A transactions.

When analyzing the suitability of comparable companies, you should consider operational, geographic and financial factors. Operational factors that should be examined include industry, products and key value drivers. Geographic factors include country and regulatory or economic environment. Financial factors include sales, profitability, EV, etc.

What multiples should I use?

Once the appropriate comparables have been selected, the next step is to choose the proper multiples. Many different multiples can be used, so it is crucial to select the one that best fits the company being valued and the purpose of the analysis. A variety of financial and non-financial multiples can be utilized. Typical multiples used include:

• EV / Sales
• P / E (Price per share to earnings per share)
• P / B (Price per share to book value per share)
• EV / Industry specific metrics (e.g. telecom towers, unique site visitors, etc.)

Note! The numerator and the denominator need to correspond with one another regarding financial structure for your analysis to be relevant. If an enterprise value multiple is utilized, the denominator needs to be a metric irrespective of capital structure (Sales, EBITDA, EBIT, Capital employed, etc.). If an equity value multiple is utilized, the denominator needs to be a metric that represents earnings, book value or cash flows to equity shareholders only.

How do I make the estimations?

Once comparable companies have been selected, their market values and key statistics must be gathered. This data can be found directly on the platform for publicly listed companies. Through our automated valuation tools, our technology handles this process entirely for you in a matter of seconds through a click of the export button.

Once all of the necessary data has been gathered, you can examine potential outliers to see if adjustments need to be made and then it is time to do the actual calculation. Market multiple valuations often utilize medians of comparable companies' ratios. For example, if five comparable companies have EV/EBIT ratios of 10, 15, 20, 25, and 30, then the median P/E ratio would be 20. The median can be used to eliminate outliers that could skew the results. Also, averages and interquartile ranges can be used to estimate a valuation range.

Once the valuation range has been calculated, it can be applied to the company being valued. For example, if Company X has an EBITDA of $10 million and we have estimated an EV/EBITDA multiple range of 15x-20x, we would multiply $10 million 15-20x to get an estimated enterprise value range for Company X of $150-$200 million.

Combining valuation ranges from different multiples can help triangulate a final estimate for the valuation of the target. These are typically presented in a football field analysis format in investment banking.

Key things to keep in mind

There are two main benefits of using market multiples valuation over other methods, such as discounted cash flow analysis. First, it is much faster and easier than other methods since all that is required is basic financial data. Second, it uses actual market values instead of future estimates, which align the valuation estimates with what markets are currently paying for similar assets.

There are a few essential aspects to remember when using this method. First, equivalent companies may be tricky to identify in industries with few companies, making finding comparables difficult. However, makes this process simple as you may be able to find niches with related value drivers rather quickly in even emerging niches with few players. Second, even if comparables can be found, especially with transaction multiples, valuation information may not always be available. Finally, market conditions can change quickly, making valuations volatile at times. Luckily, through, you have access to daily updates for financial and market data and can follow peer groups to always stay on top of key changes in market dynamics.

Market multiples valuation remains one of the most popular methods among investment bankers, equity analysts and valuation professionals due to its speed and accuracy relative to other methods. We hope you utilize market multiple analysis to the fullest.

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