Valuation 2: Multiple & Comparable Company Analysis Flashcards
(29 cards)
What is the purpose of comparable company analysis (comps)?
To value a company by comparing it to similar publicly traded firms using key financial multiples.
What is a valuation multiple?
A ratio that compares a firm’s value to financial metric like earnings, revenue, or EBITDA.
Name two common types of multiples.
Enterprise value (EV) multiples and Equity Value multiples
Why are multiples used in M&A?
To benchmark a target’s valuation against similar companies and assess fair market value.
What’s the key benefit of using EV multiples?
They are capital structure neutral and allow better comparison across firms.
Why is EV/EBITDA commonly used in M&A?
It excludes capital structure effects and non-cash expenses, such as D&A, providing a clearer view of operations.
When would you use EV/Revenue instead of EV/EBITDA?
When the company has negative EBITDA or early-stage firms with limited earnings.
What’s the formula for EV?
Markete Cap + Net Debt + Preferred Equity + Minority Interest - Cash
What is EV/EBIT most useful for?
Capital-intensive businesses where depreciation is a meaningful expense.
What is the formula for P/E?
Share price / Earnings per share or Equity value / Net income
What does P/E reflect that EV/EBITDA does not?
The company’s capital structure and financing decisions.
What type of companies typically use P/B (price-to-book)?
Financial institutions and asset-heavy businesses.
What’s a drawback of P/E?
It can be distorted by differences in capital structure or tax rates.
Why is P/E not ideal in M&A?
It reflects only equity holders and is affected by leverage.
What factors do you consider when choosing comps?
Industry, size, geography, growth rate, customer base, and profitability.
What’s a good source for finding comparable companies?
Capital IQ, Pitchbook, 10Ks, industry reports.
Why normalize financials before calculating multiples?
To remove one-time items and ensure comparability across companies.
What does LTM stand for?
Last Twelve Months
What does NTM stand for, and when is it used?
Next Twelve Months - used for forward-looking valuation.
What is a precedent transaction analysis?
Valuations based on multiples paid in past M&A deals for similar companies.
What makes a precedent transaction multiples higher than trading comps?
Buyers pay a control premium and often expect synergies.
When are precedent transactions most useful?
When valuing a target in an M&A context or IPO.
Why do we use EBITDA in precedent analysis?
It gives a clean, comparable measure of operational cash flow.
What’s a drawback of precedent transactions?
They may be outdated or reflect unique deal circumstances.
