What are the key multiples used in a comparable company analysis?

Comparable Multiples are a good benchmark to establish Fair Value/ Fair Market Value. However, applying the right multiples is where the valuation skills of a professional come into play. Firstly, the expert’s judgment in choosing the appropriate comparable companies is important. Often private companies maybe in more niche markets or less diversified than their public peers. This is where meaningful discussions with Management and industry knowledge of the expert help to discern which public companies are appropriate comps. The second step is selecting the right multiples - while Revenue, EBIT, EBITDA metrics are more commonly used, for pre-revenue, and e-comm companies other metrics like number of customers, and KPIs can be helpful.

The right metric depends on the industry. Most industries use a EV / EBITDA multiple. This comes closest to a normalized capital structure independent valuation multiple. EV / EBITDA isn't the best metric when EBITDA is negative, or at financial companies. For financial companies, price to book is the better metric. REITs generally use price to funds from operations (FFO).

Multiples: A Finer Look In finance, multiples offer insights into a company's valuation by juxtaposing its market value with distinct financial benchmarks, such as earnings or assets. These can be bifurcated into two categories: enterprise value and equity value multiples. The former encompasses the company's entire valuation, including both equity and debt. In contrast, the latter concentrates solely on shareholder equity, omitting debt. The denominator, forming the base of these ratios, can be historical or predictive metrics, with EBITDA, EPS, or sales being typical examples. This offers a robust lens for evaluating relative market worth.

In valuation multiples are ratio's that can be used to quickly estimate the value of a company. The most commonly used is the EBITDA multiple, which calculates the Enterprise value of a company in multiples of its EBITDA. If EBITDA multiples are known for valuations of comparable companies, this multiple can be applied to estimate the value of your target company. Note however, that using multiples in valuation is a relatively crude approach, as each company is unique in terms of positioning, market position, growth / outlook, capital structure, etc.

Multiples are a good way to price a company relative to its peer company. To find a peer company, the target should have a similar growth, debt profile, business model etc. To choose the multiple, business expertise is needed. For e.g. banks, financial institutions and manufacturing may use P/B where a service-based business such as IT may use P/E. There can also be ratios that may not be well known as Price/No. of users.

Contexts matter. In frontier markets like Iran the key metrics for retail investments are P/E and P/S ratios. The ratios which includes balance sheet items like book value are not deployed in the valuation exercises because high, sustainable inflations causes huge divergence between BV and their current value.

Comparable companies, or a so called peer-group, can be selected by comparing industry, product offering, profitability, capital structure, etc. When a company is active in multiple markets, it is possible to add comparable companies in each sector and weigh their contribution based on the sales of your target company in that sector. When selecting companies for this purpose however, it is important to select companies that are relatively 'pure play', which means that they are not diversified across markets.

Choosing the right set of comparable companies is paramount when embarking on a Comparable Company Analysis (CCA). The quest starts with pinpointing firms that mirror the target company's landscape—be it in business architecture, offerings, market footprint, or growth trajectory. Criteria for selection can span a broad spectrum, from industry delineation and corporate scale to profit margins, financial leverage, and expansion pace. The overarching objective is to curate a cohort of companies that most closely emulate the operational and fiscal nuances of the target entity. Perfection in this endeavor is elusive, necessitating occasional recalibrations and a touch of astute judgment to refine the comparables list.

When employing multiples for valuation, particularly EBITDA multiples, it's crucial to contextualize them with comparable transactions or valuations, recognizing the disparity between private SMEs in Europe and public US firms. Ensuring the EBITDA reflects future projections is vital, as is a thorough understanding of its components. This includes making necessary normalizations to represent the true economic performance, offering a more accurate and tailored valuation relevant to the specific market and company scale.