Common Multiples Used in Valuation
“You can analyse the past, but you have to design the future.”
— Edward de Bono
A valuation multiple is a simple way to express the market value of an asset relative to a key financial or operating metric that is believed to drive that value.
Multiples are widely used in equity research, M&A, private equity, and venture capital to compare businesses and estimate fair value.
Major Categories of Valuation Multiples
1. Earnings-Based Multiples
These relate the value of a business to its earnings or cash-generating ability.
- Price / Earnings (P/E) Ratio
- PEG Ratio (P/E adjusted for growth)
- Relative P/E
- Enterprise Value / EBIT
- Enterprise Value / EBITDA
- Enterprise Value / Cash Flow
These multiples are most useful when earnings are stable and comparable across firms.
2. Book Value-Based Multiples
These relate value to the accounting value of assets or equity.
- Price / Book Value (P/BV) of Equity
- Enterprise Value / Book Value of Assets
- Enterprise Value / Replacement Cost
- Tobin’s Q (Market Value / Replacement Cost of Assets)
These multiples are commonly used in capital-intensive industries such as banking, utilities, and manufacturing.
3. Revenue-Based Multiples
Used when earnings are volatile or negative.
- Price / Sales per Share
- Enterprise Value / Sales
Revenue multiples are widely used for start-ups, high-growth companies, and cyclical industries.
4. Asset or Industry-Specific Multiples
Some industries require customised valuation metrics.
- Price per kWh (Power sector)
- Price per ton of production (Metals, cement)
- Price per subscriber (Telecom, OTT platforms)
- Price per click (Digital advertising)
- PR industry: Pricing based on coverage or impressions
- Sector-specific P/B multiples
Caution: Industry-wide mispricing can distort relative valuation if not critically assessed.
What Valuation Ultimately Seeks
Cash flows drive value.
Multiples are shortcuts—but they should always tie back to sustainable cash generation.
Comparisons That Actually Matter in Valuation
- Profit margins (Net Margin, Gross Margin)
- Useful for comparing companies within the same industry
- Not meaningful across industries due to structural differences
- Return on Equity (ROE) and Return on Invested Capital (ROIC)
- Can be compared across industries
- Investors ultimately chase returns on capital, not margins
- High ROE alone is not enough
- The amount of capital that can be deployed also matters
- A smaller high-ROE business may create less total value than a scalable moderate-ROE one
- Comparability adjustments
- If companies have:
- Different depreciation policies, or
- Operate under different tax regimes
- Use EBIT × (1 – Tax Rate) to neutralise tax and accounting distortions
- If companies have:
Capital Cost Alignment Matters
- ROIC should be compared with Cost of Total Capital (WACC)
- ROE should be compared with Cost of Equity
- These should never be mixed or interchanged
Disclaimer:
This content is for educational and informational purposes only and should not be construed as investment advice, research, or a recommendation to buy or sell any securities. Financial metrics and valuation outcomes may vary based on assumptions and market conditions.
