Guide to Valuation Multiples

Guide to Valuation Multiples: 9 Must-Know Metrics Every Business Analyst Should Master

This guide to valuation multiples equips analysts, investors, and business owners with the knowledge needed to benchmark performance, screen investments, and assess acquisition targets quickly and effectively.

What Are Valuation Multiples?

Valuation multiples are financial tools used to assess a company's value relative to a specific metric such as earnings, sales, or book value. These ratios are widely used because they offer a quick snapshot of how the market or potential investors price a business, helping to make informed decisions when time is short.

Why Use Valuation Multiples?

Multiples offer a simplified approach to valuation that is particularly useful in market comparisons. They're quick, intuitive, and based on real-world market data. A Corporate Finance Institute report notes that nearly 85% of buy-side analysts use multiples in initial deal screening.

9 Common Valuation Multiples Explained

1. Price-to-Earnings (P/E): Compares share price to earnings per share. Widely used for profitable companies. A P/E of 20 suggests investors are willing to pay £20 for every £1 of earnings.

2. Enterprise Value to EBITDA (EV/EBITDA): Adjusts for capital structure by comparing a company's total value to its earnings before interest, taxes, depreciation, and amortisation. Ideal for comparing firms with different debt levels.

3. Price-to-Sales (P/S): Useful for early-stage companies without profits. A lower P/S may indicate undervaluation, depending on growth expectations.

4. Price-to-Book (P/B): Compares share price to book value per share. Often used in financial institutions. A P/B below 1 might indicate a company is trading below its asset value.

5. EV/Revenue: Similar to P/S but accounts for debt. Helpful in valuing high-growth or unprofitable companies.

6. PEG Ratio: Divides the P/E ratio by earnings growth rate. A PEG below 1 can suggest undervaluation.

7. EV/EBIT: A more conservative version of EV/EBITDA as it includes depreciation and amortisation.

8. Dividend Yield: Useful for income investors. Calculated as dividend per share divided by stock price.

9. Price-to-Cash Flow (P/CF): Especially relevant in sectors with large non-cash expenses.

How to Use Valuation Multiples in Practice

• Compare companies within the same industry to account for sector-specific norms.
• Use historical averages and market medians for benchmarking.
• Adjust for outliers such as exceptional earnings or one-off events.
• Use in conjunction with intrinsic methods like DCF for a full picture.

Valuation Multiples by Industry (2024 Snapshot)

According to PitchBook, average EV/EBITDA multiples in 2024 were:

• Technology: 17.4x
• Healthcare: 14.2x
• Consumer Goods: 12.7x
• Energy: 7.8x
• Financial Services: 10.5x

Frequently Asked Questions (FAQs)

What are the limitations of valuation multiples?

They rely heavily on peer group accuracy and may not capture company-specific risks. Multiples can also fluctuate due to market sentiment, making timing important.

How do I calculate EV/EBITDA?

EV = market cap + debt – cash. EBITDA is taken from the income statement. Divide EV by EBITDA to get the ratio.

Is there a guide to valuation multiples Excel calculator?

Yes, many platforms offer tools, such as CFI and Macabacus, where you can download free Excel templates for valuation multiple analysis.

What is the best multiple to use?

There's no single best multiple—it depends on the industry, stage of the company, and whether it is profitable. Analysts typically use a combination.

Conclusion: Valuation Multiples Are Essential Tools

This guide to valuation multiples shows just how useful these metrics can be when used correctly. While not without flaws, multiples remain critical for comparing businesses, valuing shares, and making fast but informed decisions. Used alongside other tools like DCF models, they can provide a solid foundation for any valuation approach.

Strategies to Consider

• Use Industry Benchmarks: Reference sector-specific multiples from reliable databases.
• Integrate Storytelling: Show how multiples reflect company narratives (e.g., turnaround stories).
• Create Interactive Tools: Offer downloadable templates or calculators.
• Update Regularly: Refresh industry data at least quarterly for SEO and user value.
• Optimise for Featured Snippets: Use concise definitions and bullet lists.