Multiple Comparable Valuation Method
Multiple Comparable Valuation Method
Multiple Comparable Valuation Method
DEFINITION/INTRODUCTION
This is a valuation technique or method that determines the different market
values for comparable companies. Here, the assumption is that a certain ratio
is applicable and can be interpreted across different companies. This is seen to
be the oldest technique in valuation and it is a relative approach as well.it
assumes that a ratio comparing value to a firm specific variable, such as
operating margins or cash flow is the same across similar firms. Investors also
refer to it as; multiples approach, multiples analysis and valuation multiples.
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recommended that the multiples should be applied on both the historic data
and projected data of the target company.
VALUING THE TARGET COMPANY; this is simply justifying the results through
our own criterion and clearly establish the reasons for the selection of the
comparable companies and similarities currently or expected with the target
company.
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In a more complex example, EV= MC+D+PS+MI-CC
WHERE:
PS= preferred shares
MI= minority interest
Example:
B and L Company reports sales for the year of 70 m fcfa. The company has 10m
of short term liabilities on the books and 25m of long term liabilities; it has
90m fcfa worth assets with 20% of that in cash. Lastly, the company has 5m
shares of common stock outstanding and the current price of the stock is
25fcfa per share. Calculate the; enterprise value and EV/sales.
Solution
EV = 125m+10m+25m-18m=142m
EV/SALES= 142/70 = 2.0286x
EV/EBIT (EARNINGS BEFORE INTEREST AND TAXES). This is a ratio used to
determine if a stock is priced too high or too low in relation to similar
stocks and the market as a whole.
EXAMPLE: company A is going public an analyst needs to determine its
share price. There are five similar companies to company A that operate
in its industry, companies B,C,D,E and F. the EV/EBIT ratios for the
companies are 11;3x,8.3x,7.1x,6.8x and10.2x respectively. The average
EV/EBIT ratio would be 8.7x. A’s financial analyst would apply the 8.7x
multiple to company A’s EBIT to find its EV consequently its equity value
and share price.
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EQUITY MULTIPLES; under this category, the most commonly used are ;( P/E
ratio) price per earnings ratio, (PEG) price-to-earnings to growth ratio, price-to-
book ratio and price-to-sales ratio. Equity multiple scan be artificially impacted
by a change in capital structure even when there is no change in enterprise
value EV .however, equity multiples are more commonly used by investors
because they can be calculated easily and are readily available via most
financial websites and newspapers.
P/E ratio= price per share/earnings per share
Earnings per share= net profit/number of shares
Example: company A’s stock price=30 FRS, EPS=2
Therefore, P/E= 30/2 =15
The P/E ratio measures a company’s market price compared to its
earnings. It shows what the market is willing to pay today for a stock
based on a company’s past or future earnings. This ratio can be
benchmark against other stocks in the same industry and it helps show
whether a stock is overvalued or undervalued.
P/S( price to sales )= market capitalisation/sales or revenue
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Example: considering the above P/E ratio of 15, let suppose that the
company’s EPS have been and will continue to grow at 10% per year.
Therefore, PEG= 15/10 = 1.5
EXAMPLE: a company has 100m in assets on the balance sheet and 75m
in liabilities. The book value of that company would be calculated simply as
100m-75m=25m. Considering that they are 10m shares each costing 5 FRS.
Each share will represent 25/10=2.5 book value. The P/B ratio =5/2.5=2x. This
tells us that the market price is valued at twice its book value. Or P/S =
(5*10m)/25m=2x
ADVANTAGES AND DISADVANTAGES OF MULTIPLE COMPARABLE VALUATION
METHOD
ADVANTAGES
Multiples are important because they revolve around key statistics
related to investment decisions.
It helps analysts to make sound judgements when they are appropriately
used because it provides valuable information about a company’s
financial status.
DISADVANTAGES
Analysts may encounter difficulties when using the multiples analysis in
comparing companies or assets. This is because
The company’s position for a certain time period and fails to include the
company’s growth in business. Therefore, resulting values can only be
applicable in the short run companies that may same to have identical
operations surely have different accounting policies, thereby leading to
misinterpretation.
Multiples valuation analysis does not take into consideration the future
point in time; it only regards instead of long-term ones.
It should be noted that the simplicity in calculating multiple analysis is both an
advantage and a disadvantage; it’s advantageous in that it allows analysts to
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make quick computations to assess a company’s value while disadvantageous
in that it simplifies complex information into just a single value or series of
values.