How can you use multiples to improve valuation methods?

The selection of appropriate multiples is indeed a critical step in valuation, as it lays the foundation for an accurate and relevant analysis. Your distinction between equity, enterprise, and sector-specific multiples provides a clear framework for their application. Equity multiples are particularly useful for understanding the value from a shareholder's perspective, focusing on returns or value per share. In contrast, enterprise multiples offer a broader view of a company's value, encompassing its entire capital structure. Sector-specific multiples, as you noted, add another layer of precision, especially in industries with unique growth or financial characteristics.

One of the most used multiple is EV/EBITDA, and can be largely applied to many sectors. However, you can't apply it to value Financial Institutions. Due to the nature of the business banks can be valued by P/BV or P/E given EBITDA is not an applicable metric.

Representativeness is hard to find, and there's judgment to be applied. Disney is not a pure streaming company. Apple is not a pure computer company. Amazon is not a pure marketplace. When you try to compare, take into consideration the nuances of your operations. If some peer multiples are being skewed due to other business, regions or other external factors. And avoid comparing to outliers. It's important to have a mid size list of peers, and to understand them and if they have one-offs affecting the comparison.

Identifying comparable peers is a pivotal step in valuation using multiples. It involves analyzing similar business activities, financial performance, and market conditions. Criteria like industry classification, size, geography, profitability, growth, and risk are crucial. Ensuring data quality and considering the timing of valuation are also key. The goal is to select a representative peer sample that accurately reflects the valuation context without skewing the analysis. This careful selection enhances the precision and relevance of the valuation, providing a more robust and reliable financial assessment.

Calculating and adjusting multiples is vital for accurate valuation. It involves using historical or projected data to determine multiples for both the target and its peers. Adjustments are crucial for differences in accounting practices, capital structures, or non-recurring items. Methods like normalizing or harmonizing the data ensure consistency and comparability. This careful process, aimed at aligning the multiples as closely as possible, is key for a reliable and meaningful valuation comparison.

One of the most potent tools in this valuation quest is the Discounted Cash Flow (DCF) method. DCF goes beyond superficial market metrics, offering a robust technique to evaluate a company's intrinsic value based on its future cash flows. By discounting projected cash flows to their present value, DCF provides a comprehensive outlook on a company's financial health. Analyzing a company's valuation using DCF offers investors the ability to factor in various risk elements, growth projections, and the economic landscape. This meticulous approach facilitates a more nuanced understanding of the investment landscape, allowing stakeholders to make well-informed decisions that align with their risk appetite and financial objectives.

Starting Guide - P/E: most popular; use for companies (cos) with stable earnings, - IT/Tech cos - PEG: cos with higher predicted growth; also for start ups - P/B: For Financial Institutions, as the earnings comes from their assets(loan) & ROE-P/B matrix is an important tool. - P/S: For start ups with negative earnings; also be used for FMCG/retail cos as a supporting tool; do not consider profit margins P/CF: less used; suited for real estate cos as an extra tool. - EV/EBITDA: used widely to value cos as a whole (operating efficiency); mainly for capital intensive cos with varying debt; nullifies effect of capital structure. - Other model: EV/ton - Cement/mining cos; EV/subscriber - telecom/media cos; but results can be same as EV/EBITDA.