Operating Multiples

When evaluating an organization, it is also interesting to use non-financial indicators.

For example, one organization has a better margin than another, but what does this mean? Which expenses contribute to the better margin? If it is due to the salary budget, is this good or bad?

Below is an example of organizations providing flight services. Organization A has a higher salary budget relative to revenue compared to Organization B, but to understand this thoroughly, we need to delve into the causes.

In the photo, ASM stands for Available Seat per Mile, meaning the ratio of the salary budget to revenue is broken down into two components: the ratio of sales to possible seats/mile (essentially the price per flight) and the ratio of salaries to maximum possible seats/mile. This breakdown shows that A’s salary budget is higher per seat/mile, but the price level is also higher.

But what does this mean? Why are salaries higher? Does it pay employees higher wages or have more employees relative to the number of seats? Therefore, another level of breakdown is needed. As seen in the diagram, A has a higher salary level but relatively fewer employees.

Source:
VALUATION – Measuring and Managing the Value of Companies
7th Edition
McKinsey & Company
Tim Koller, Marc Goedhart, David Wessels