Multiples Valuation Framework

Generic Valuation Process

Identify the issue/goal

• Issue: Is it an acquisition, an IPO, a stock recommendation (other)?
• Goal: To find a fair price (true value), in general.

How to come up with a recommendation?

1. Is the company well positioned going into the future?
2. What is the “fair” price/value?

Size-Up

External

• Economy
• Industry

Internal

• Strategy
• Management
• Financial Performance (ratio analysis)
• Other case specifics (e.g. potential for synergies)

Notes

• Speak to all areas of size-up (external/internal) but highlight important ones
• What are the key risks?
• What qualitative issues affect your valuation analysis?

Valuation Analysis (Multiples)

Choice of comparable

• Industry classification
• Capital Structure (Search D/E ratio) (This one is Key for P/E)
• Size (Compare Market Cap, EBITDA, or Sales)
• Growth rate

Choice of ratios

• P/E
• EV/EBITDA
• P/Sales A full list of ratios can be found at the end of this document

Obtaining Multiples

$${\text{Implied EV}}_{\text{Firm X}}=\text{EV}/{\text{EBITDA}}_{2019,\text{Comparable}}\times {\text{EBITDA}}_{2010,\text{Firm X}}$$

Note: Don’t forget to use the correct year, the comparable should be in the same year as the years we’re getting our data from!

If you need to go from EV to obtain $V_{Equity}$ recall that:

$$EV=V_{Equity}+V_{Debt}-\text{Excess Cash}$$

And if you need to go from $V_{Equity}$ to Price per share:

$$\text{Price per share}=\frac{V_{Equity}}{\text{\# Shares Outstanding}}$$

List of Multiples

There are many options we can use to value a firm using multiples. Here is a list of some common ones:

• Price to Earnings (P/E)
• Enterprise Value to EBITDA (EV/EBITDA)
• Price to Sales (P/Sales)

Less common ones include

• EV to EBIT (EV/EBIT)
• EV to Sales (EV/Sales)

While it’s difficult to choose which one, sometimes our hand is force. Either the case in HBA1 Finance Course won’t give us all the information, or a firm may have negative values for EBIT, EBITA, or Sales which narrow down our options. Note, that EV can be negative! So long as the value of the equity is not at the end. But this is very rare.