What are some reasons for doing valuation by multiples?

Quick, Convenient to calculate
 Use readily available data

Simple, intuitive interpretations
 Easilydigestible
What is the physical interpretation of a pricetoearnings (P/E) ratio?
It's the amount you pay for $1.00 of earnings
What is the physical interpretation of an
Enterprise Value / Total Asset ratio?
It's the amount you paid much you pay for a $1.00 of assets  if you were an unlevered firm.
What are the steps required to complete a valuation by multiples analysis?
 Choose comparable firms
 Choose bases for multiple
 Choose: average/median across industries
 Determine the base for the firm being valued

Value the firm (convert to price per share)
What is the single most important step in the valuation by multiples analysis process?
1. Choosing comparable firms
What is the formula for enterprise value?
Enterprise Value =MC +Total Debt− C
where:
MC=Market capitalization; equal to the current stockprice multiplied by the number of outstanding stock shares
Total debt=Equal to the sum of shortterm andlongterm debt
C=Cash and cash equivalents; the liquid assets ofa company, but may not include marketable securities
True/False: The vast majority of corporate debt is traded.
False: The vast majority of corporate debt is not traded.
How do we value a company's debt?
we use the book value of a company's debt
A valuation multiple consists of a _________ and a _________.
A valuation multiple consists of a numerator and a denominator.
What metrics can we use for the denominator?
Choose the denominator (base) from either:
 Balance Sheet
 Income Statement
What does the left side of the balance sheet represent?
Balance Sheet

Total Assets  Total Debts
 Shareholders Equity


The left side of the balance sheet represents enterprise value.
What does the right side of the balance sheet represent?
Balance Sheet

Total Assets  Total Debts
 Shareholders Equity


Those who have contributed funds to get that firm up and running.
Draw the simplest form of an income statement
Is the following an acceptible ratio?
[Enterprise Value]

[Total Assets]
Yes, because Enterprise Value and Total Assets both represent all shareholders.
Is the following is an acceptible ratio?
[Enterprise Value]

[Stockholders Equity]
No!
EV represents ALL shareholders whereas, whereas stockholders equity only represents stockholders.
Is the following is an acceptible ratio?
[Equity Value]

[Net Income]
Yes!
Because Equity Value represents stockholders and Net Income represents stockholders.
What is the trick for knowing if an income statment metric represents all stakeholders (enterprise value) or just shareholders (equity value)?
Income Statement
+ REV
 COGS
 SGA
EBIT all stakeholders (Enterprise Value)
 Taxes governments
 Interest debt holders, shareholders
Net Income all shareholders (Equity Value)
What are two acceptible Equity Value ratios?
[Market Value of Equity] / [Balance Sheet Shareholders Equity]
[Market Value of Equity] / [Net Income] == P/E
What are four acceptible "Enterprise Ratio" metrics?
 EV / Total Assets
 EV / Revenue
 EV / EBITDA
 EV / EBIT
What is, historically, the most accurate ratio?
Enterprise Value / Total Assets
What is, historically, the least accurate ratio?
[Market Value] / [Net Income]
(P/E Ratio)
What are the three ratios recommended by Craig Lewis?

Enterprise Value / Total Assets
 Market Value of Equity / Book Value of Equity
 Enterprise Value / EBITDA
If given the following metrics, how would you calculate enterprise value?
 Average(EV/TA)
 TA
EV = Average(EV/TA) * TA
How do you select comparable firms?
Go down the line and filter based on the following (starting from the top):
 Industry Classification
 Technology
 Clientele
 Size
 Leverage
 Profitibility
Explain the regressionbased approach to valuting by multiples?
1.Use every company in an industry
2.Choose metrics which are pertinent (EV/EBITDA, Revenue, Size)
3.Metrics become 'x' (independent) variables
4.Company value becomes 'y' (dependent) variable.
5.Calculate a linear regression equation.
6.Use 'company of interests' variables in the regression equation.
What is the MAIN IDEA behind valuation by multiples?
“The basic idea behind using multiples for valuation is that similar assets should sell for similar prices, whether they are houses or shares of stock.”
What is the issue of using P/E ratio as a multiple?
Although the P/E is widely used, it is distorted by capital structure and nonoperating gains and losses.
When you are building multiples, the denominator should be a ______ (forecast, historical) of profits, preferably normalized for unusual items, rather than ________ (forecasted, historical) profits.
When you are building multiples, the denominator should be a forecast of profits, preferably normalized for unusual items, rather than historical profits.
Why are forwardlooking metrics used when completing a valuation by multiples?
Forwardlooking multiples generally have lower variation across peer companies.