Finance Multiples Valuation Guide

This guide outlines steps to perform a multiples valuation for a target company using comparable companies. This is for HBA1 Finance Course.

Step 1: Company Size-Up

This is especially key to this method, because it’s important to choose the right comparable firms.

EXTERNAL ANALYSIS

Here, look at the industry and the economy. The former is more important.

Let’s say a firm is like Rosetta Stone, we had to choose whether it was a tech firm or an education firm. This will affect the comparable we choose. And it’s very helpful, to be able to eliminate almost half the companies on our list just by making this one decision.

INTERNAL ANALYSIS

Really…. this isn’t that important. Check all the boxes, but focus on financial performance. Look at ratios and trends.

Step 2: Choosing Comparable

Here, we have a few options on what metrics we want to choose for our comparable firms:

• Industry Classification: this is important if the comparable companies are indexed by industry, otherwise, dw.
• Capital Structure: We look at the D/E Ratio here
• Size: As a proxy for size, we use EBITDA (not the market cap).
• Growth: We haven’t really used this in class
• Others?: What the fuck is others. I think the profs like to troll us.

Now after looking at this list, really the conclusion is, let’s just pick as many ratios as our template has, and just look at the companies that are grossly different from us, keeping the rest. Remembering to sort by industry if industry is given to us.

The only important part is that you 3 or more companies to compare us to and have a justification for each company you eliminated

Step 3: Choosing Ratios

The term “ratios” in this heading refers to our EV/EBITDA type ratios, not financial ratios but valuation ratios.

There are lots of ratios we can calculate! Honestly, just calculate all the ones you can. There are restrictions to each so I’ll list them here:

• EV/EBITDA
• EV/EBIT
• EV/Revenue
• P/E
• P/Revenue

If any of the above ratios are negative, reject them. We’re not looking for negative value nor are we falling for any sign flipping shit.

Additionally, for each ratio, always calculate one using historical data (the last year) and one using projected data (the next year). Keeping both.

Step 4: Calculate Share Price

There are two kinds of ratios. Price ratios and Enterprise Value ratios.

EV Ratios

When using an EV ratio, multiplying by our data to get our EV, we once again have to convert it to the value of equity, and then a share price using the below formula:

$$\text{Share Price}=\frac{\text{EV}-\text{Debt}+\text{Cash}}{OutstandingShares}$$

Price Ratios

Price ratios, such as P/E and P/Revenue already give you a share price directly

Step 5: Pick a Final Share Price

You can use a Valuation Football Field. But we were told that is not necessary. Instead, just pick a number where most of your ratios and analysis overlap each other.

Then justify the price with a few bullshit qualitative factors.

It’s also nice to include your range of DCF prices from your sensitivity analysis here in your football field.