What are Mutiples in Corporate Valuations ?

The Multiples are a quick method used in Corporate Valuation. We can also call them Valuation Multiples and they are ratios used to evaluate the valuation of the company. The basic assumption in Multiples is that higher multiples indicate higher valuation and lower multiples indicate lower valuation. 

Below are the different kinds of Multiples that can be used on case to case basis :

1. Earning Mutiples :

The company's earnings are a fundamental driver of its long-term value. They are most commonly used for company valuation comparing share price to the earnings. 

Let's see the examples of Earning Multiples : 

A. P/E Ratio :

The formula is: Share Price divided by Earning per share 

It is also called equity multiples and is used to determine how high or low the price is paid per share as compared to how much is earned per share.

Whereas P/E is a measure of expected earnings, how we can compare peer companies with each other through P/E?

In Market Comparable valuation methodology P/E ratio is calculated for each peer listed company and an average P/E is calculated based on whether a discount or no discount is put on it to calculate the share price of a non-listed company ( the formula for that is P/E into Earning per share )

What are the Limitation of P/E ratio ? 

P/E ratio takes into consideration the share price which is volatile and if the volatility increases it can through P/E in total vain (whereas thsi situation is only true for short term period)

2. EV/EBITDA

The formula is Enterprise Value divided by Earning before interest, tax, depreciation, and Amortization.

It is a popular tool to compare companies within the same industry. It helps to understand whether the company is overvalued or undervalued. 

As an equity research analyst, I use it to estimate a company's target value. Now to understand the ratio we will break this into two parts as follows : 

What is Enterprise Value (EV)?

The EV is the numerator of the ratio, and to give a very basic understanding of what EV is we can see how it is calculated. So EV is equal to Equity value or Market Capitalization plus Debt less any Cash in the simplest format to go with. 

What is EBITDA?

Very simple, please go with the full form !! Earning before interest, tax, depreciation, and amortization.

This ratio is easy to calculate and use.