Enterprise Valuation Multiples

Valuation using multiples

Valuation using multiples or relative valuation is a method of estimating the value of an asset by comparing it to the values assessed by the market for similar or comparable assets.

The process consists of:

* Identifying comparable assets (the peer group) and obtaining market values for these assets.

* Converting these market values into standardized values relative to a key statistic, since the absolute prices cannot be compared. This process of standardizing creates valuation multiples.

* Applying the valuation multiple to the key statistic of the asset being valued, controlling for any differences between asset and the peer group that might affect the multiple.

Peer group

A peer group is a set of companies or assets which are selected as being sufficiently comparable to the company or assets being valued (usually by virtue of being in the same industry or by having similar characteristics in terms of earnings growth and/or return on investment).

In practice, no two businesses are alike, and analysts will often make adjustment to the observed multiples in order to attempt to harmonize the data into more comparable format. These adjustments may be based on a number of factors, including:

* Industrial / business environment factors: Business model, industry, geography, seasonality, inflation

* Accounting factors: Accounting policies, financial year end

* Financial: Capital structure

* Empirical factors: Size

Valuation multiples

A valuation multiple is simply an expression of market value of an asset relative to a key statistic that is assumed to relate to that value. To be useful, that statistic – whether earnings, cash flow or some other measure – must bear a logical relationship to the market value observed; to be seen, in fact, as the driver of that market value.

In stock trading, one of the most widely used multiples is the price-earnings ratio (P/E ratio or PER) which is popular in part due to its wide...