What Is A Valuation Multiple?
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- Опубліковано 30 вер 2024
- This lesson was prompted by a question that came in from a reader and student of our courses the other day: "When you divide Enterprise Value by Revenue (EV / Revenue), or Price Per Share by Earnings Per Share (P / E), what does that actually mean?
By breakingintowal... "Financial Modeling Training And Career Resources For Aspiring Investment Bankers"
In other words, if Enterprise Value / Revenue is 5.8x, what does that number actually mean?"
Answer often given in textbooks: How valuable a company is in relation to its sales, profits, and so on... based on those metrics, how does the market value that company?
But the real answer: the multiple itself means nothing at all!
By itself, a single valuation multiple such as 5.8x or 15.3x or 25.7x means... absolutely nothing.
Valuation multiples are ONLY meaningful in relation to the multiples of OTHER, similar companies ("public comps" or "public company comparables").
It's like saying, in real life, "The asking price for that house is $500,000, or around $500 per square foot. What does that mean?"
Answer: It depends... on the asking prices of similar houses in the region, also on the location, the type of house, # beds and bathrooms, the condition, the neighborhood, the public school system...
Could mean that the house is very expensive, or that it's very cheap, or that it's priced about right.
You already know this if you've studied valuation and have valued companies on your own...
BUT there are 2 specific points that often go overlooked with valuation multiples:
1. The companies you're comparing should ideally have similar growth and margin profiles, or the comparison is less meaningful.
It's NOT enough just to be in the same industry and be about the same size - that's a starting point, but financial profiles should ideally be similar as well.
Be very careful - acquisitions often distort these numbers!
Very different margins also distort the numbers (ex: 2 companies with similar revenue and 1 has a much higher margin - mathematically speaking, very likely to trade at a LOWER multiple just because the denominator will be bigger).
2. Even if the companies DO have similar financial profiles, a higher or lower multiple doesn't necessarily mean that one company is "overvalued" or "undervalued" because qualitative factors also play a role.
For example, did the company just make an acquisition? Did it miss earnings? Did it get sued? Did a new competitor pop up?
Think of valuation multiples as "clues" in a detective story... they can guide you in the right direction, but 1 clue is not enough evidence to solve the mystery of whether a company is valued appropriately.
We demonstrate both of these points with Ralcorp (a food and beverages company) in the video, and show you how the set of public comps all have very different financial profiles that were impacted by acquisitions in some cases.
Key Takeaways:
1. A valuation multiple means nothing on its own - only meaningful when compared to other companies', and ideally the median multiple from a set of other companies.
2. When picking a set of public comps, it's not just about industry and size... even if you do select companies with those criteria, must pay attention to growth and margins as well.
If all the companies in your set have very different growth and margins from the company you're valuing, you may want to consider a different set.
If there are acquisitions, it's better to pay more attention to forward multiples / growth rates / margins instead - for 1-2 years in the future.
The analysis is MOST meaningful if, for example, all the companies have very similar growth and margins but the one you're looking at trades at much different multiples - then it's worth investigating further and seeing what explains that.
3. Just because a multiple is higher or lower than other companies' multiples doesn't mean that the company you're valuing is overvalued or undervalued... it's just one of many factors.
Here, the presence of a hostile bidder threw off the numbers. Plus, rumors of the company spinning off divisions...
Could be any number of things in real life as well - earnings announcements, changes in strategy, expansion plans, patents, lawsuits, management team changes, etc.
Love the way you present information and give examples!! So helpful! Also the text included on excel helps me to read and follow along the examples easier 🎉
Thanks for watching!
Thanks for posting all of these videos. Another great way to get ahead in undergrad.
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You bet man.I like the way you present and share your knowledge without any hidden agenda. Keep healthy with your fam. Lord of Buddha be with and bless all.
Thanks for watching!
Thanks for the video. One point is confusing, however. I get that mathematically a company with a higher margin will have a lower EV/EBITDA margin than a comparable company (nearly same revenue) with lower margins, because the EBITDA number is higher. But that IMPLIES that both companies are valued at nearly the same EV, which doesn't seem logical to me. Investors/acquirers should rather value the EBITDAs the two companies generate and thus both companies should have nearly the same multiple. Regarding your example, I think it's not that evident that the first company couldn't be valued 5x more than the other. After all, in a DCF analysis it would be, all other things being equal., wouldn't it?
Your explanation basically suggests that Investors value the revenues/market share a lot.
A quick reply would be very appreciated. Does this hold most of the time empirically?
I think you are over-thinking it. Valuation multiples mostly relate to the growth rates in the underlying metric. If a company is growing its EBITDA more quickly than another company, it often has a higher EV/EBITDA multiple. I would not even think about margins in this discussion at all because margins only matter if they change substantially over time and then stabilize at a much higher or lower level. The point here was simply that sometimes it's a bit deceptive to compare companies with vastly different margins, but the underlying reason is that if the margins are very different, the growth rates are probably very different as well (and so are the company sizes).
@@financialmodeling Okay, we are on the same page. Thanks a lot for the answers, I think its amazing that you still reply after all those years.
Hey tomorrow I have an M&A interview. It would be VERY helpful if you could answer my question: EQV only considers common shareholders. However, multiples with EQV for example EQV/Net Income includes preferred shareholders because net income does not adjust for preferred shareholders. Am I right and what should we do?
That's not correct. You should be using Net Income to Common, which deducts Preferred Dividends, in the P / E multiple if the company has Preferred Stock.
Great video !! I have two questions:
1. What multiple do you use for services companies? EV / SALES?
2. Where do you find comparables of midcap companies?
1) EV / EBITDA, EV / Sales, and P / E in most cases (see the business services article on M&I).
2) Google Finance, Capital IQ, Factset, whatever you have access to.
Thanks for the useful videos you're uploading man, keep it up! Btw is it possible to have the link for this excel model you're using in this video?
Thanks for watching! All the spreadsheets are available in our full courses. Some are also available via the case studies on M&I and in the quarterly webinars we host with Job Search Digest.
There is a problem with using comps from other countries? They trade at a discount? For example, the multiples of Brazilian companies would be comparable to American enterprises?
You should not do that. There are accounting differences, and the risk and potential returns are both higher in emerging markets. This can sometimes work if the two countries are very similar (e.g., developed European countries of the same size), but you shouldn't use Brazilian companies to value U.S. companies.
AMAZINGGGGGGGGGGGGGGGGGGGGGG....thank you so much
Thanks for watching!
This is a fantastic explanation
Thanks for watching!
Its Awesome work. People will understand these complex topics very easily due to you're hard efforts. Can you share the resource material used?
I'm not sure what you mean. If there are Excel or PDF files available, you can click "Show More" and scroll down to see and download them.
@@financialmodeling yes I am looking for excel shown in this video. In description box ..excel link is not available
@@financialmodeling Excel file would be great!
Good explanation!
Thanks for watching!
Hi Thanks for the video my question Is comparable company analysis alone sufficient for valuation or do i need to do DCF analysis for valuing a company and Thank you very much.
If you have only 5 minutes, yes, comparable company analysis alone is fine. If you have at least 1 hour, it's much better to use a DCF because a DCF is "real" valuation. Comparables of any type are just an abbreviated version of a real valuation via a DCF.
You know a lot about valuations and businesses, do you invest yourself? Did you work at an IB before?
gigante87 Please see the "About" page of the site if you want more background information on the business.
Why would market noise regarding the company affect its multiples, especially why would it affect EV/EBITDA, if both EV and EBITDA have nothing to do with market value..?
??? Not really sure what you're asking because Enterprise Value for a public company is directly affected by market sentiment since it's based on Equity Value, which is based on the company's share price.
Would you be able to make your spreadsheet template available to us?
This one is not available, but there are plenty of other examples of similar templates for valuation multiples and valuations throughout this channel.
hi, great video. I am confused..what is the difference between current and forward multiples...what if I will multiply one year forward EBITDA multiple with one year forward EV/EBITDA multiple
Current multiples are based on LTM or last fiscal year results, while forward ones are based on projected results. For example, the current multiple as of today might be based on the last twelve months from before March 31, 2017 (the date of the company's most recent report). But a forward multiple might be based on Dec 31, 2016 or Dec 31, 2017 numbers.
@@financialmodeling so do we necessarily should use calendarization for forward multiples? E.g. it is wrong if we are comparing Dec 31,2017 forward vs Sep 30, 2017 forward multiple?
@@paulaguilar_985 Depends on how far off the periods are, but yes, you should calendarize so that forward periods match up if they're off by a quarter or more. Sep 30 vs. Oct 31 doesn't really matter, but Sep 30 vs. Dec 31 is a big enough difference to justify calendarizing. In a quick analysis you can skip this or simplify, or just hope that most of the companies have the same fiscal years.
How do you get to an actual value per share of Ralcorp?
Apply the median multiple to get its Implied Enterprise Value, work backwards to get its Implied Equity Value, and divide by the share count... see the other videos on this channel or our full courses for more.
Great video! Although, I'm very interested by how you came up with the projected growth rate.
Once again, nice job!
You can look in equity research for each company, or look at consensus estimates for companies' revenue on Google or Yahoo Finance or Bloomberg. It's harder to get if you're not at a bank but you can get free equity research on some sites, like TD Ameritrade if you have a brokerage account there, or just look at Yahoo Finance and sometimes they have consensus estimates listed for revenue and EPS.