2Using Multiples in Valuation•Value multiples are collected from comparable companiesMultiple = V0 = Multiple from comparables x Indicator of company•Typical market values: Share Price (P), Equity Value (M) Enterprise Value (EV)•Typical indicators: Earnings (E), EBITDA, Cash Flow (CF), Sales (S), Book Value of Equity (B), •Typical multiples: EV/EBITDA, EV/EBIT, P/E, P/B, P/S, P/CF, PEG (P/E to earnings growth)Market PriceIndicator
3Consistency and attention to detail is key in rather simple multiples analysis•Every analyst has their own judgements on the multiples, so multiples often differ across sources •Use same definitions for the company and its peers•If you did not compute the multiples yourself, at least find out howthey were computed•Things where an analyst needs to make a pick when computing multiples: gross vs. net debt, CFO vs CF, common vs. total equity, unadjusted or adjusted financial statements, undiluted or diluted EPS…
4Two different definitions for equity ratio(Equity plus non-controlling interests)/(Total assets less advance payments received)(Equity plus depreciation reserve*(1 – tax rate))/(Total sum of the balance sheet –advances received)Source: Company annual reports
5Practical judgements when doing valuationbased on multiples•EV/EBITDA, EV/EBIT, and P/E most common•Always have several multiples with different indicators for a balanced perspective•First understand business model, then pick relevant peerselection criteria (product mix/geo mix/size/salesgrowth/profitability/integrated vs. pure-play etc.), and finally peers•Owners and management have an incentive to position thecompany along with higher-valued peers, such as being a high-tech company•Preference of relevance over number of peers•3 may be on the short side, more than 12 is definitely too much•Leaving out extraordinary items and standardizing accounting practices is good if you have the time•Trailing vs. forward multiples, smoothed averages•Simple average is biased*, use medianWhich multiplesto use?
- Summer '14
- Valuation, Generally Accepted Accounting Principles