Value Multiplier
In economics and finance, a multiplier refers to an economic or financial factor that, when increased or changed, causes increases or changes in many other related economic or financial variables.
In finance, the most standard multiplier is the earnings multiplied. The multiplier approach for company valuation is to multiply the firm's forecast profit by a relevant multiplier.
The use of the multiplier is intuitive and straightforward, mainly to provide quick answers to compelling questions. However, some analysts argue that this method is superior, qualitatively-methodologically, over other valuation methods, such as the cash flow discounting approach.
Implementing the multiplier valuation method involves forecasting the accounting profit for the next several years and multiplying the expected profit, usually by industry average multipliers.
The multiplier approach, however, has many drawbacks. First, it ignores material gaps between the projected accounting profit for the near term and the firm's projected cash flow expectation. This gap may cause biases.
In finance, the most standard multiplier is the earnings multiplied. The multiplier approach for company valuation is to multiply the firm's forecast profit by a relevant multiplier
Second, the multiplier approach tends to ignore assets that do not create short-term accounting profitability, such as excess building rights, activities that are short-term losses (such as research and development activities, etc.), and more.
Despite its drawbacks, most multiplier approach users tend to interpret the change in multiplier as increasing investment attractiveness.
Two other multipliers are the capital multiplier and the sales multiplier. These multipliers may also be a preliminary indication only, examining the relative value of a share.
Equitest's online valuation platform offers the best valuation tools. The platform lets the user adopt various valuation methods, among them - the valuation with multiples.
