MULTIPLES VALUATION TECHNIQUE
Valuations using multiples is one of the three main approaches to valuing a business, sometimes referred to as the ‘market-ba
approach’. The method assumes that similar companies (or assets) should be valued similarly, so it uses financial data from ot
companies to help determine a company’s value. A financial ratio (or ‘multiple’) observed from these peer companies is applie
company that is being valued. By applying this multiple from similar companies, the value of the new company is estimated. T
simple and practical method widely used by valuation practitioners. The challenging aspect is finding the appropriate compari
multiples to use.
MAJOR ASSUMPTIONS OF MULTIPLES APPROACH
This method assumes that one good way to value a company is to compare it with the value of similar companies. The major a
similar assets – or companies – will sell at similar prices, and that it is valid to make such a comparison between companies.
The method relies on using a financial metric known as a ‘multiple’ (a ratio), as a comparison point. So another major assumpti
method, is that the type of ratio chosen as the comparison point, such as P/E or EV/EBITDA should be similar across similar firm
VALUATION USING MULTIPLES
The core way the approach works is to look at the financial performance of other similar companies, but not actually compare
CHOOSING THE MULTIPLE
Multiples are taken from a range of different financial metrics, like EV/Sales or EV/EBITDA, and then applied to that related me
Sales, or EBITDA) of the company you’re valuing by multiplication as shown above.
So, in the case of using EV/EBITDA, you would need to know the (median) EV/EBITDA multiple from similar companies, or the
this case, you take that multiple (ratio) and then multiply it by your company’s EBITDA, to give you the EV or Enterprise Value.
IF COMPANY HAS NO EARNINGS/ZERO EARNINGS - DO NOT USE PE RATIO
If the company has no earnings (made loss ), we can use formula EV/Sales or EV/EBITDA
EV = Equity Value +All debt + Preferred Value - Cash & cash equivalents
Sales = Total Annual Revenue
s referred to as the ‘market-based
o it uses financial data from other
hese peer companies is applied to the
new company is estimated. This is a
ding the appropriate comparison company
imilar companies. The major assumptions being that
arison between companies.
nt. So another major assumption when adopting this
uld be similar across similar firms.
nies, but not actually compare directly with say the main metric like sales, or EBITDA, but use the ‘ratio’ from those figures as the compari
hen applied to that related metric (e.g.
om similar companies, or the industry. In
ou the EV or Enterprise Value.
Multiples Approach
Name Price Earnings/Share P/E Multiple(times)
Company A 30 3 10.0
Company B 105 12 8.8
Company C 45 6 7.5
Company D 60 9 6.7
Company E 19 3 6.3
Average 7.9 10
Median 7.5
COMPANY X 22.5 3
(Share Price)
MP/Share = PE*EPS
Multiples Approach
Name Price Earnings P/E Multiple
Company A 30 3
Company B 105 12
Company C 45 6
Company D 60 9
Company E 19 3
Average #DIV/0!
Median #VALUE!
COMPANY X #DIV/0! 3
(Share Price)
(MP =PE * EPS)
Note : Taking Median as a base would be more viable option.
Multiples Approach
Name Price Earnings/Share P/E Multiple (times)
TATA Motors 801.25 90.58 8.8
Heromotocorp 4697 206.9 22.7
bajaj Auto 9161.8 263.96 34.7
Maruti 11279.25 445.97 25.3
Average 22.9
Median 24.0
COMPANY X 3599.50 150
(MP =PE * EPS)
Multiples Approach
Name EV Sales EV/Sales
TATA Motors
Heromotocorp
bajaj Auto
Maruti
Average #DIV/0!
Median #VALUE!
Company X #VALUE! 300000
EV of Co. X= Median * Sales
EV = Equity Value +All debt + Preferred Value - Cash & cash equivalents
Sales = Total Annual Revenue
Multiples Approach
Name EV EBITDA EV/EBITDA
TATA Motors
Heromotocorp
bajaj Auto
Maruti
Average #DIV/0!
Median #VALUE!
Company X #VALUE! 20000
EV of X= Median * EBITDA
EV = Equity Value +All debt + Preferred Value - Cash & cash equivalents
EBITDA from Income Statement/ Profit and Loss Account
