20180212_Valuation_techniques_multiples.pdf - Lecture 9 Multiples Using Multiples in Valuation Value multiples are collected from comparable companies

20180212_Valuation_techniques_multiples.pdf - Lecture 9...

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Lecture 9Multiples
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2Using Multiples in ValuationValue multiples are collected from comparable companiesMultiple = V0 = Multiple from comparables x Indicator of companyTypical 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
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3Consistency and attention to detail is key in rather simple multiples analysisEvery analyst has their own judgements on the multiples, so multiples often differ across sources Use same definitions for the company and its peersIf you did not compute the multiples yourself, at least find out howthey were computedThings 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…
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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
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5Practical judgements when doing valuationbased on multiplesEV/EBITDA, EV/EBIT, and P/E most commonAlways have several multiples with different indicators for a balanced perspectiveFirst understand business model, then pick relevant peerselection criteria (product mix/geo mix/size/salesgrowth/profitability/integrated vs. pure-play etc.), and finally peersOwners and management have an incentive to position thecompany along with higher-valued peers, such as being a high-tech companyPreference of relevance over number of peers3 may be on the short side, more than 12 is definitely too muchLeaving out extraordinary items and standardizing accounting practices is good if you have the timeTrailing vs. forward multiples, smoothed averagesSimple average is biased*, use medianWhich multiplesto use?
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  • Summer '14
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  • Valuation, Generally Accepted Accounting Principles

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