Comparable/Multiples Valuation

Comparable/multiples valuation is a method for valuing stocks by comparing them to similar companies. It is one of the most common methods used by investors and analysts to value stocks.

Pros of Comparable/Multiples Valuation

• Simple and easy to use: Comparable/multiples valuation is a relatively simple and easy-to-use valuation method. It does not require complex financial models or a deep understanding of the company’s financial statements.
• Transparent: Comparable/multiples valuation is a transparent valuation method. The data used to calculate multiples is publicly available, and the calculations are relatively straightforward.
• Comparable companies: Comparable/multiples valuation is based on comparable companies. This means that it is based on real-world market data, and it is not based on assumptions about the company’s future performance.

Cons of Comparable/Multiples Valuation

• Relies on comparable companies: Comparable/multiples valuation relies on the availability of comparable companies. If there are no comparable companies, or if the comparable companies are not truly comparable, then the valuation will be inaccurate.
• Sensitive to market conditions: Comparable/multiples valuation is sensitive to market conditions. If the market is overvalued, then the valuation will be overvalued. If the market is undervalued, then the valuation will be undervalued.
• Does not consider company-specific factors: Comparable/multiples valuation does not consider company-specific factors, such as the company’s management team, its competitive landscape, and its growth prospects.

Most Popular Multiplicators for Stock Valuation

The most popular multiplicators for stock valuation include:

• Price-to-earnings ratio (P/E ratio): The P/E ratio is the ratio of a company’s stock price to its earnings per share (EPS). It is one of the most widely used multiples for stock valuation.
• Price-to-book ratio (P/B ratio): The P/B ratio is the ratio of a company’s stock price to its book value per share. It is used to compare companies with different levels of debt.
• Price-to-sales ratio (P/S ratio): The P/S ratio is the ratio of a company’s stock price to its sales per share. It is used to compare companies with different levels of profitability.
• Enterprise value-to-EBITDA ratio (EV/EBITDA ratio): The EV/EBITDA ratio is the ratio of a company’s enterprise value to its earnings before interest, taxes, depreciation, and amortization (EBITDA). It is used to compare companies with different capital structures.

How to Use Comparable/Multiples Valuation

To use comparable/multiples valuation, you first need to identify a set of comparable companies. These companies should be similar to the company you are valuing in terms of industry, size, and growth prospects. Once you have identified a set of comparable companies, you need to calculate their multiples. You can then use the multiples of the comparable companies to value the company you are interested in.

For example, let’s say you are interested in valuing a company called Acme Corporation. You have identified a set of three comparable companies: Beta Corporation, Gamma Corporation, and Delta Corporation. The P/E ratios of the comparable companies are as follows:

drive_spreadsheetExport to Sheets

The average P/E ratio of the comparable companies is 16. To value Acme Corporation using comparable/multiples valuation, you would multiply Acme Corporation’s EPS by 16.

For example, let’s say Acme Corporation’s EPS is $10. The comparable/multiples valuation of Acme Corporation would be $160 per share.

Conclusion

Comparable/multiples valuation is a popular method for valuing stocks. It is a simple, transparent, and relatively accurate method for valuing stocks. However, it is important to note that comparable/multiples valuation is only as good as the comparable companies that you select. If you select the wrong comparable companies, then your valuation will be inaccurate.

It is also important to note that comparable/multiples valuation does not consider company-specific factors. If you are serious about investing in a particular company, then you should conduct a thorough analysis of the company before making an investment decision.