What is a multiple?
A “multiple” is a simple ratio that expresses how much investors are willing to pay for a unit of a company’s financial performance (earnings, cash flow, sales, etc.). Multiples are widely used to compare valuation across companies and to derive quick, market‑based estimates of value. Common multiples include price-to-earnings (P/E), enterprise‑value‑to‑EBITDA (EV/EBITDA), EV/EBIT, and EV/sales.
Why multiples matter
– Fast, market‑based comparison tool across companies or time periods.
– Useful in valuation (comparable companies or precedent transactions).
– Helps flag potentially overvalued or undervalued companies when used with comparable peers.
– Complements detailed methods like discounted cash flow (DCF); doesn’t replace them.
Basic formula
Multiple = Performance metric A / Performance metric B
In practice, the numerator is typically the market value measure (price, market capitalization, or enterprise value) and the denominator is a performance measure (earnings, EBITDA, sales).
Key multiples and what they tell you
– Price-to-Earnings (P/E) = Price per share / Earnings per share (EPS)
– Equity multiple. Shows how many dollars of price investors pay per dollar of earnings.
– Best when EPS is positive and comparable across firms. Not useful with negative earnings.
– EV/EBITDA = Enterprise Value / EBITDA
– Enterprise multiple. Common for comparing operational cash‑flow potential across firms with different capital structures. Popular in M&A and buyouts.
– EV/EBIT = Enterprise Value / EBIT
– Similar to EV/EBITDA but incorporates depreciation/amortization. Useful for capital‑light firms or when depreciation is economically meaningful.
– EV/Sales = Enterprise Value / Revenue
– Useful for companies with negative earnings or inconsistent margins (early‑stage firms, turnarounds).
How to calculate the enterprise value (EV)
EV = Market capitalization + Total debt (short + long term) + Minority interest (if any) + Preferred stock (if any) − Cash and cash equivalents
Practical examples (simple)
– P/E: Stock price = $20, EPS = $2 → P/E = 20 / 2 = 10x. Investors pay 10 times last year’s earnings.
– EV/EBITDA: Market cap = $500m, debt = $100m, cash = $20m → EV = 500 + 100 − 20 = $580m. If EBITDA = $50m → EV/EBITDA = 580 / 50 = 11.6x.
Step‑by‑step: How to perform a multiples (comps) valuation
1. Define the valuation purpose and peer group
– Are you pricing a takeover, screening investments, or doing a fair‑value check?
– Choose comparable companies by industry, size, growth profile, margins, geography.
2. Select relevant multiples
– Choose multiples that best reflect how the business generates value.
– Capital‑intensive industries: EV/EBITDA or EV/EBIT.
– High growth or unprofitable companies: EV/sales may be more relevant.
3. Gather and normalize financials
– Use consistent accounting bases (trailing 12 months, last fiscal year, or forward estimates).
– Normalize for nonrecurring items, one‑offs, different fiscal year ends, or accounting policy differences (e.g., leases, R&D capitalization).
4. Calculate market values and performance metrics
– Market cap = share price × diluted shares outstanding.
– EV = market cap + debt − cash.
– Use diluted EPS for P/E; use recurring EBITDA/EBIT for enterprise multiples.
5. Compute multiples for the peer set
– Compute each multiple for each peer and the target.
– Summarize with median, mean, and quartiles. Median is commonly used (less affected by outliers).
6. Apply the peer multiple to your target
– Choose a central tendency (e.g., median EV/EBITDA) and multiply by the target’s normalized metric to estimate value.
– Example: median EV/EBITDA = 10x; target EBITDA = $40m → implied EV = 400m. Subtract debt and add cash to get implied equity value.
7. Adjust and cross‑check
– Adjust for differences in growth, margin, size, or risk (premiums/discounts).
– Cross‑check with other multiples and a DCF or precedent transactions analysis. Run sensitivity scenarios.
Practical rules and adjustments
– Trailing vs forward: Trailing (TTM) multiples use historical figures; forward multiples use analyst or management forecasts. Forward can reflect expected growth but introduces forecast risk.
– Use diluted shares and adjusted EPS to avoid distortions (options, convertible securities).
– For cyclical firms, consider average earnings over a cycle or cyclically adjusted metrics.
– Negative denominators: P/E is meaningless with negative EPS; use EV/sales or EV/EBITDA if EBITDA is positive.
– Capital structure: Use enterprise multiples (EV/EBITDA, EV/EBIT, EV/sales) when comparing firms with different leverage. P/E is equity‑only and affected by leverage and taxes.
– Nonrecurring items: Exclude one‑time gains/losses so the multiple reflects recurring performance.
– Accounting differences: Depreciation methods, lease accounting, and tax regimes can change comparability—normalize when possible.
Interpreting multiples: what high/low means
– Higher multiple usually implies higher expected growth, superior margins, lower risk, or scarcity/quality of the business.
– Lower multiple may indicate slower growth, lower margins, higher risk, or market undervaluation.
– Always compare within industry/peer set and consider fundamentals—high multiple ≠ overvalued if growth justifies it.
Common pitfalls and limitations
– Misleading across differing business models (comparing software to mining via the same multiple can be meaningless).
– Accounting distortions and nonrecurring items can skew multiples.
– Overreliance on a single multiple—use a range and cross‑validation.
– Market sentiment can push multiples above/below fundamentals for extended periods.
Practical checklist before presenting a multiples valuation
– Is the peer group appropriate and recent?
– Are the financials normalized for one‑offs and accounting differences?
– Have you used consistent time frames (TTM, fiscal year, forward)?
– Did you use diluted shares and correct debt/cash figures to compute EV?
– Did you cross‑check implied equity value with other methods (DCF, precedent transactions)?
– Have you documented key assumptions and sensitivity ranges?
Example: compact worked example
– Target: EBITDA = $40m, net debt = $60m (debt − cash).
– Peer median EV/EBITDA = 9x.
– Implied EV = 9 × 40 = $360m.
– Implied equity value = EV − net debt = 360 − 60 = $300m.
– If diluted shares = 10m → implied price per share = 300 / 10 = $30.
When to prefer which multiple
– P/E: mature, profitable companies with stable accounting.
– EV/EBITDA: firms where capital structure varies or when you want pretax operating cash flow comparison.
– EV/EBIT: when depreciation and amortization are economically important.
– EV/Sales: early‑stage businesses or those with volatile or negative profits.
The bottom line
Multiples are fast, practical tools for valuation and comparison. Used correctly—selecting appropriate multiples, normalizing data, and comparing to a relevant peer set—they provide useful market‑based checks on value. But they are not a substitute for deeper analysis (e.g., DCF) and can be misleading if accounting differences, one‑offs, or growth prospects aren’t properly considered. Always use multiple metrics and document your assumptions.
Primary source used
– Investopedia, “Multiple,” Julie Bang. https://www.investopedia.com/terms/m/multiple.asp
If you’d like, I can:
– Build a step‑by‑step Excel template for a comps analysis.
– Run a sample comparable companies valuation if you give me the target’s financials and a peer list.