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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