Valuation By Multiple

---

A common mistake is valuing a company by comparing its multiples with those of other companies in the industry in a superficial way.

The issue is that selecting both the comparable company and the correct multiple is not an easy task. When choosing a multiple, it’s important to understand which parameters influence it, and based on that, select the appropriate comparable organizations.

For example, Value/FCF depends on the organization’s growth rate (g) and risk level (r)—and if we compare it to a company whose r and g are different, we can be misled.

The table below shows the multiples and their corresponding parameters, which must be clarified before starting a comparison of organizations:

For instance, before comparing the EV/EBIT multiple, we need to verify whether the comparable organizations have the same tax expense structure.

The table is based on the formulas below:

პ.ს.

P.S.

For comparisons, it is often also necessary to adjust the financial statements. You can find more details about this here: Key Adjustments in Applying Market Multiples.

Source:
Corporate Valuation Theory, Evidence and Practice
Mark E. Zmijewski; Robert W. Holthausen, Second Edition

---