Equity and Enterprise Multiples

Relative valuation: logic and multiples Multiples — the foundation of relative valuation: comparing a company with comparable peers through standardized ratios. Faster and simpler than DCF, but requires careful selection of comparables and understanding what multiples reflect. Logic of relative valuation Assumption: similar companies should trade at similar multiples. If a peer trades at 15x earnings, the target should trade at ~15x (adjusted for differences). Market-based: multiples reflect what the market is paying. Incorporates market expectations, sentiment. “What would the market pay?” Quick and intuitive: easier to explain than DCF. Widely used by practitioners, media.

Equity vs Enterprise multiples Equity multiples: use equity value (market cap) in the numerator, equity-based metric in the denominator. Examples: P/E, P/B. Enterprise multiples: use Enterprise Value (Equity + Debt - Cash) in the numerator, firm-wide metric in the denominator. Examples: EV/EBITDA, EV/Sales. Key distinction: equity multiples for equity value; enterprise multiples for firm value. Do not mix (P/E is incorrectly compared to enterprise multiples).

Price-to-Earnings (P/E) P/E = Stock Price / EPS = Market Cap / Net Income. How much investors pay per dollar of earnings. Trailing P/E: based on last 12 months’ earnings. Backward-looking. Forward P/E: based on next year’s estimated earnings. More relevant for valuation. Interpretation: higher P/E implies higher growth expectations, lower risk, or market enthusiasm. Lower P/E — lower growth, higher risk, or undervaluation. Limitations: affected by capital structure (interest expense reduces NI), one-time items, accounting policies. Negative earnings → undefined.

Price-to-Book (P/B) P/B = Stock Price / Book Value per Share = Market Cap / Shareholders' Equity. Market value relative to accounting value. Interpretation: P/B > 1 — market values the company above book (intangibles, growth). P/B Useful for: asset-heavy businesses (banks, real estate). Less useful for tech (book value doesn’t capture intangibles).

Price-to-Sales (P/S) P/S = Stock Price / Sales per Share = Market Cap / Revenue. Value relative to revenue. When useful: loss-making companies (P/E undefined), early-stage growth. Comparable across different cost structures. Limitations: ignores profitability. Company A with 30% margin and Company B with 5% margin shouldn’t have the same P/S.

EV/EBITDA EV/EBITDA = Enterprise Value / EBITDA. Most commonly used enterprise multiple. Why EBITDA: pre-interest (capital structure neutral), pre-tax (tax neutral), pre-D&A (depreciation policy neutral). Approximates operating cash flow. Interpretation: lower EV/EBITDA — cheaper. But a low multiple may reflect low growth, high risk, industry issues. Industry benchmarks: varies widely. Tech may be 15-25x; utilities 8-12x; retail 6-10x.

EV/EBIT EV/EBIT = Enterprise Value / Operating Income. Similar to EV/EBITDA but includes D&A. When preferred: for capital-intensive businesses where D&A reflects real asset consumption. More conservative than EV/EBITDA.

EV/Sales EV/Sales = Enterprise Value / Revenue. Enterprise version of P/S. Use case: early-stage, unprofitable companies. Comparable across capital structures. Watch out: ignores profitability. Should adjust for margin differences.

EV/FCF EV/FCF = Enterprise Value / Free Cash Flow. Most theoretically correct enterprise multiple. FCF captures: profitability, working capital efficiency, CAPEX needs. True cash available. Limitation: FCF is volatile (CAPEX lumpy), negative FCF possible. Smooth over cycle.

Choosing multiples P/E: for profitable, stable companies. Most widely quoted, intuitively understood. EV/EBITDA: for comparing companies with different capital structures. Standard in M&A. P/B: for asset-heavy businesses, banks. EV/Sales or P/S: for unprofitable growth companies. Industry-specific: EV/Subscribers (telecom), EV/Reserves (oil & gas), EV/Room (hotels).

Forward vs Trailing Forward multiples: based on projected earnings/EBITDA. More relevant for valuation — buying the future, not the past. Trailing: based on historical. Actual, verified data. Useful when estimates are unavailable or unreliable. Consensus estimates: analysts’ forecasts. Source: Bloomberg, FactSet, Refinitiv.

Adjusted multiples Exclude one-time items: use “normalized” earnings/EBITDA for comparability. Stock-based compensation: some add back SBC to EBITDA (non-cash), others don’t (real expense). Be consistent. Leases: post-IFRS 16, operating leases on the balance sheet. May need adjustment for comparison with pre-IFRS 16 peers.