Valuation Using Multiples - Comparison of Commonly Used Valuation Multiples

Comparison of Commonly Used Valuation Multiples

Equity price based multiples are most relevant where investors acquire minority positions in companies. Care should be used when comparing companies with very different capital structures. Different debt levels will affect equity multiples because of the gearing effect of debt. In addition, equity multiples will not explicitly take into account balance sheet risk.

Multiple	Definition	Advantages	Disadvantages
P/E ratio	Share price / Earnings per share (EPS) EPS is net income/weighted average no of shares in issue EPS may be adjusted to eliminate exceptional items (core EPS) and/or outstanding dilutive elements (fully diluted EPS)	Most commonly used equity multiple Data availability is high	EPS can be subject to differences in accounting policies and manipulation Unless adjusted, can be subject to one-off exceptional items Cannot be used if earnings are negative
Price / cash earnings	Share price / earnings per share plus depreciation amortization and changes in non-cash provisions	Cash earnings are a rough measure of cash flow Unaffected by differences in accounting for depreciation	Incomplete treatment of cash flow Usually used as a supplement to other measures if accounting differences are material
Price / book ratio	Share price / book value per share	Can be useful where assets are a core driver of earnings such as capital-intensive industries Most widely used in valuing financial companies, such as banks, which rely on a large asset base to generate profits	Book values for tangible assets are stated at historical cost, which is not a reliable indicator of economic value Book value for tangible assets can be significantly impacted by differences in accounting policies
PEG ratio	Prospective PE ratio / prospective average earnings growth	Most suitable when valuing high growth companies	Requires credible forecasts of growth Can understate the higher risk associated with many high-growth stocks
Dividend yield	Dividend per share / share price	Useful for comparing cash returns with types of investments Can be used to establish a floor price for a stock	Dependent on distribution policy of the company Yield to investor is subject to differences in taxation between jurisdictions Assumes the dividend is sustainable
Price / Sales	Share price / sales per share	Easy to calculate Can be applied to loss making firms Less susceptible to accounting differences than other measures	Mismatch between nominator and denominator in formula (EV/Sales is a more appropriate measure) Not used except in very broad, quick approximations

Enterprise value based multiples are particularly relevant in mergers & acquisitions where the whole of the company’s stock and liabilities are acquired. Certain multiples such as EV/EBITDA are also a useful complements to valuations of minority interests, especially when the P/E ratio is difficult to interpret because of significant differences in capital structures, in accounting policies or in cases where net earnings are negative or low.

Multiple	Definition	Advantages	Disadvantages
EV/Sales	Enterprise value / net sales	Least susceptible to accounting differences Remains applicable even when earnings are negative or highly cyclical	A crude measure as sales are rarely a direct value driver
EV/EBITDAR	Enterprise value / Earnings before Interest, Tax, Depreciation & Amortization and Rental Costs	Proxy for operating free cash flows Attempts to normalize capital intensity between companies that choose to rent rather than own their core assets Most often used in the transport, hotel and retail industries	Rental costs may not be reported and need to be estimated Ignores variations in capital expenditure and depreciation Ignores value creation through tax management
EV/EBITDA	Enterprise value / Earnings before Interest, Tax, Depreciation & Amortization. Also excludes movements in non-cash provisions and exceptional items	EBITDA is a proxy for free cash flows Probably the most popular of the EV based multiples Unaffected by depreciation policy	Ignores variations in capital expenditure and depreciation Ignores potential value creation through tax management
EV/EBIT and EV/EBITA	Enterprise value / Earnings before interest and taxes (and Amortisation)	Better allows for differences in capital intensiveness compared to EBITDA by incorporating maintenance capital expenditure	Susceptible to differences in depreciation policy Ignores potential value creation through tax management
EV/NOPLAT	Enterprise value / Net Operating Profit After Adjusted Tax	NOPLAT incorporates a number of adjustments to better reflect operating profitability	NOPLAT adjustments can be complicated and are not applied consistently by different analysts
EV/opFCF	Enterprise value / Operating Free Cash Flow OpFCF is core EBITDA less estimated normative capital expenditure requirement and estimated normative variation in working capital requirement	Better allows for differences in capital intensiveness compared to EBITDA Less susceptible to accounting differences than EBIT Use of estimates allows for smoothing of irregular real capital expenditures	Introduces additional subjectivity in estimates of capital expenditure
EV/ Enterprise FCF	Enterprise value / Free cash flow Enterprise FCF is core EBITDA less actual capital expenditure requirement and actual increase in working capital requirement	Less subjective than opFCF Better allows for differences in capital intensiveness compared to EBITDA Less susceptible to accounting differences than EBIT	Can be volatile and difficult to interpret as capital expenditure is often irregular and “lumpy”
EV/Invested Capital	Enterprise value / Invested capital	Can be useful where assets are a core driver of earnings, such as for capital-intensive industries	Book values for tangible assets are stated at historical cost, which is not a reliable indicator of economic value Book value for tangible assets can be significantly impacted by differences in accounting policies
EV/Capacity Measure	Depends on industry (e.g. EV/subscribers, EV/production capacity, EV/audience)	Not susceptible to accounting differences Remains applicable even when earnings are negative or highly cyclical	A crude measure as capacity measures are rarely a direct value driver

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