Valuation with Multiples | Equitest - Business Appraisal Software
Valuation with multiples is a valuation method, belongs to the relative valuation approach or comparable valuation.
The valuation using multiples, or "relative valuation," is a process that consists of finding the value of a company by adopting the multiple of a similar company. More precisely, it includes three steps:
The first step is identifying comparable assets (the peer group) and obtaining market values for these assets.
The second is 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.
The last step is applying the valuation multiple to the asset's key statistic, controlling for any differences between the asset and the peer group that might affect the multiple.
Valuation with multiples is a valuation method, belongs to the relative valuation approach or comparable valuation
For example, if one uses the PE multiple, he should calculate the average PE multiple of similar firms. He should then multiply the firm's earnings with the average PE multiple to calculate the value. For example, if the average PE multiple is 10, and the firm's earnings are 1,000,000 US dollars, its value is 10,000,000 US dollars.
The valuation with multiples has several benefits:
Simplicity: Their implication of the valuation using multiples method is a straightforward and user-friendly method of assessing value.
Usefulness: When used properly, multiples are robust tools that can provide useful information about relative value.
Relevance: Multiples focus on the key statistics that other investors use. Since investors in aggregate move markets, the most commonly used statistics and multiples will have the most impact.
Despite its advantages, the valuation with multiples also has drawbacks:
Static: A multiple represents a picture of the firm at a certain point in time but misses to capture the changing and evolving nature of the company and the industry.
Short-term: Multiples are based on past data or near-term forecasts. Valuations based on multiples will not capture the differences in projected performance over the long term.
Simplistic: A multiple valuation distills a great deal of information into a single number. By combining many value drivers into one figure, multiples may make it difficult to disaggregate different drivers' effects, such as growth, on value.
Difficulties in comparisons: Multiples are used to make comparisons of relative value. If the peer group includes different firms relative to the valued firm, it can lead to the wrong value in one or two aspects.
Dependence on correctly valued peers: The use of multiples only reveals patterns in relative values. The result might be that if the peer group as a whole is misvalued, the resulting multiples will also be misvalued.
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.
