Multiples Flashcards
What are the most common multiples?
EV/Revenue, EV/EBITDA, EV/EBIT, P/E, P/BV (Book Value)
Which types of multiples do you know?
- Equity Multiples
- EV Multiples
- Lagging and Leading Multiples
- Trading and Transaction Multiples
What are pros and cons of a multiple valuation?
Pros:
- Simple concept
- Robust if retrieved properly
- More multiples means more meaningful valuation
- Generate valuation range
- Highly relevant in practice
- Easier to defend than other methods
Cons:
- Very condensed metrics
- Dependency on many factors requires proper adjustments
- Adjustments can take a lot of time
- Only works if a lot of comparables exist
- Multiples assume identical companies
- Very short-term oriented
- Relative valuation (company can be very good and still have low valuation if market peers are bad)
Does multiple for future years tend to increase or decrease?
They usually fall, assuming growing company EBITDA grows as well and lowers multiple. In EV/EBITDA, EV is reflection of all future cash flows (that hopefully tend to grow) while EBITDA is a present metric.
Is valuation more meaningful using EBIT or EBITDA multiple?
Both possible. EBITDA is important because it is at top of IS and therefore very comparable. However, asset intensive companies like heavy manufacturing tend to be valued using EBIT multiples as it reflects how many assets they have and how they depreciate.
“References to EBITDA make us shudder – does management think the tooth fairy pays for Capex?” -Warren Buffet
When would you use EBITDAR multiples (R = Rent)?
Rent and operating leases are also excluded so we are even closer to revenue. EBITDAR multiples are used if companies in an industry use highly different ownership and rent strategies (e.g. two clothing discounters, one rents shop, one buys them). Mostly used in retail industry.
Why would you use a sales multiple?
If other metrics are negative.
Where is the biggest difference when using a multiple before or after financial results?
Everything above are EV multiples, everything below are Equity multiples.
When would you use EBITA multiples?
Alternatively, to EBIT multiples as depreciations (material) are excluded but amortizations (immaterial) are included.
Is the development of P/E or EV/EBITDA multiples more volatile over time?
P/E multiple is more volatile as equity investors only get residual value that is affected by many factors, especially debt. E.g. €1b EV, €100m EBITDA, €500m Equity, €50m Earnings. Both multiples are 10x. If EV increases to €1.1b EV/EBITDA is 11x. But Equity also increases to €600 and multiple becomes 12x because of leverage.
Which multiples are capital structure neutral and which are not?
Everything before financing in IS is EV multiple and therefore capital structure neutral (e.g. EV/EBIT). Everything below isn’t (e.g. P/E).
When is a P/E multiple especially useful?
- As addition to other (EV) multiples (given similar capital structures)
- When small parts of equity are acquired (therefore often used on buyside)
How can a theoretical P/E be determined?
P = Dividend_1 / (r-g)
= EPS_1 * Payout Ratio / (r-g)
= EPS_0 * (1+g) / (r-g)
P/E = P/EPS
= EPS * (1+g) * Payout Ratio / (r-g) / EPS
= Payout Ratio * (1+g) / (r-g)
Would you use a multiple either for the previous/current/next year?
Either current or next. Last year is over and therefore not relevant.
A peer group of engine manufacturers has a median multiple of 8x with a low range around it. One of them has 4.5x. What could be reasons for it?
Company in difficult state, potentially going towards restructuring. EBITDA still strong but valuation and resulting EV already low. Also if EBITDA are way too high and not believed by market.
Why do multiples need to be adjusted?
Throughout IS a lot is dependent on accounting standards. Therefore identical companies could be valued at different multiples and you need to adjust them to still get same value.
On which variable do you select multiples?
- Industry
- Company Size
- Similar margins
- Similar growth
- Similar geographic focus
- Similar position in supply chain
- Similar product portfolio
- If P/E multiples are used then similar capital structure
When are trading multiples higher than transaction multiples?
Transaction multiples have a time lag and therefore if market is high trading multiples can be substantially higher
When comparing trading and transaction multiples, which takeover premium would you expect?
Between 10-30%
When would you not use a multiples valuation?
Two cases:
- When few peers are available
- When company has negative EBITDA etc. it leaves you with only sales multiples or industry specific multiples
What are some industry specific multiples?
- Technology: EV/Unique Visitors, EV/Pageviews, EV/Subscribers
- Retail/Airlines: EV/EBITDAR (Rent): because rent can be highly variable
- Energy: P/MCFE, P/MCFE/D (MCFE = 1m cubic foot equivalent, D = day), P/NAV
- REITs: Price/FFO, Price/AFFO (AFFO = adj. funds from operations); adds back depreciation and subtracts gain on sale of property
- Healthcare: EV/Beds
- Mining: EV/EBITDAX (Exploration)
Could you use EV/NI?
No, never! EV is for all investors, Net Income just for equity investors.
Which valuation leads to lowest, which to highest valuation?
No rule but DCF and Transaction Multiples usually highest because transactions include premium and DCF is usually rather optimistic. Trading multiples are usually lower as they don’t include premiums and can be very low depending on market.
How do you know if an industry specific multiple is meaningful?
Only if it’s actually related to company. You could do regression analysis on e.g. EV and Beds (for hospital) and find out if there is a positive correlation.
