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Corporate Finance (Subject) / Multiples Approach (Lesson)

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  • Definition Compare of the Value of an asset relatively to the values by the market for similar or comparable assets Law of one Price: "in an efficient market, all identical goods must have same price"
  • Usage of Multiple Valuation Early Stage of Acquisition When not enough detailed/ internal financial data is available to meet data requirements of other methods Comparison with DCF Value
  • Trading Multiples Multiples derived from current stock market prices (Market Price / Current Earnings) Stand Alone Value
  • EntV = Fair Entity Value EntV = Market Cap + Market Value of Debt
  • Enterprise Value Multiples EntV / EBITDA PRO independent of leverage EBITDA is a proxy for Cash Flow Good for Cross country comparisons CONTRA ingnores reinvestment needs ignores value created by tax management
  • Enterprise Value Multiples EntV/ EBIT PRO: Independent of leverage good measure of cyclical companies CONTRA: distorted (verzerrt) by accounting standards, depreciation ignores the value created by tax management
  • Enterprise Value Multiplies EntV/Sales PRO: Low impact of accounting standards possible if earnings are negative CONTRA: Sales don`t include information about profitability
  • Equity Value Multiplies P/E Ratio Price (per Share) / Earnings (per Share) Factor investors are willing to pay for earnings PRO: frequently used multiple high data availibility CONTRA: distored by accounting standards sensitive for cyclical companies can be distorted by leverage cant be used if earnings are negative
  • Equity Value Multiplies P/B Ratio Price per Share / Book Value per Share* *= Book Value = Total Equity = Total Assets - Total Liabilities -> should be >=1!! higher = better PRO: Useful if assets ar a core driver of value high data availibility CONTRA: Book values are historical accounting standards impact the book values
  • Advantages of Multiples Multiples are "user friendly" high data availibility extract some factors to make cross-country comparison available
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  • Disadvantages of Multiples Data has to be comparable Input Data is only a snapshot company can affect some data "windowdressing"

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