Valuation Multiples

Question 1

What are valuation multiples? What are they used for?

Answer 1

Valuation multiples are a way to express a company’s value in shorthand and they give us a way to compare different companies

Question 2

What are some common valuation multiples? What are the advantages and disadvantages of each?

Answer 2

EV/EBITDA - completely independent of capital structure and CapEx, makes it easy to compare a wide variety of companies. Can overstate performance from capital-intensive industries.
EV/EBIT - somewhat affected by CapEx (due to depreciation), which makes it better for sectors that are reliant on

Question 3

What are the 3 most common valuation techniques?

Answer 3

Public comparables, precedent transactions, and DCF.

Question 4

Walk me through public comp and precedent transactions

Answer 4

1. You filter for a set of companies based on a set of metrics. For comps, it would be filtering for companies with similar geography, size, industry, while for precent transactions it would be filtering for M&A deals with similar geography, time, and industry.
2. For each company, find relevant metrics. Usually this might look like 1 sales related metric like revenue, in addition to 2 profitability metrics like EBITDA and net income.
3. Calculate their respective metrics. For example, EV/EBITDA, EV/revenue, P/E
4. Apply these multiples to the target company for a valuation range

Question 5

What is unlevered free cash flow? How is it different from levered free cash flow? What are the formulas for each?

Answer 5

Unlevered free cash flow is essentially discretionary spending that a company has to spend after paying for operations and capital expenditures.
UFCF = NOPAT + non-cash expenses - increase in working capital - Capex

Levered free cash flow is just the UFCF but also accounting for debt repayments.
LFCF = UFCF - mandatory debt/interest repayments

Question 6

How do you interpret public comps? For example if your current multiple is lower than comparable companies, what does that mean?

Answer 6

Assuming that the growth rates and the margins are about the same/similar, it means that the company being analyzed is undervalued.

Question 7

When is M&A premium analysis? When would you use it?

Question 8

What is liquidation valuation? When would you use it?

Question 9

What is sum-of-parts valuation? When would you use it?

Question 10

Why might one company trade at a higher multiple than another? Give me 3 reasons

Answer 10

1. Stronger growth prospects
2. Higher margins
3. Lower risk (more predictable cash flows, earnings) justify higher multiple