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Multiples Approach

Reviewed by Vineeth | Updated on Oct 05, 2020

Catalogue

Introduction

The multiples approach is the evaluation theory which is based upon the concept that the assets that are similar will sell at similar prices. It considers that a ratio comparing worth with a company-specific variable, such as operating margins and cash flows, is pretty much same across all similar companies. Valuation multiples and multiples analysis are the other names of the multiples approach among investors.

Understanding Multiples Approach

Typically, ‘multiples’ is a broad term for a category of various indicators that may be used to evaluate a stock. A multiple is merely a ratio which is extensively obtained by taking the ratio of the estimated or market value of a security to the worth of an item mentioned in its financial records, such as statements.

The approach of multiples is a method of comparables analysis which pursues to evaluate similar firms by making use of the same financial metrics and tools.

Analysts that are using the valuation approach will consider that a specific ratio is applicable and holds good to several organisations that are operating on the same business or industry lines.

In simple words, the concept that the multiples analysis is based upon is that when companies are comparable, the multiples approach may be made use of in order to determine the worth of one organisation on the basis of valuation of another one.

Equity Multiples and Enterprise Value

The approach of multiples requires capturing several financial characteristics and operations (such as the anticipated growth rate over a particular timeframe) of a company in a solitary number which can be multiplied by a particular finance metric to obtain an equity value or enterprise value.

Equity multiples and enterprise value are two categories of multiples valuation. PEG ratio, P/E ratio, price to sales ratio, and price to book ratio are the most commonly used equity multiples.

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