How do you use relative valuation for cross-border or cross-industry analysis?

1 Choose the right multiples

The first step in relative valuation is to choose the appropriate multiples to compare your target company with its peers. Multiples are ratios that relate a company's market value to its financial performance, such as price-to-earnings (P/E), enterprise value-to-EBITDA (EV/EBITDA), or price-to-book (P/B). However, not all multiples are suitable for cross-border or cross-industry analysis, as they may be affected by different accounting standards, capital structures, growth rates, or business models. Therefore, you should select multiples that are consistent, comparable, and meaningful across different markets and sectors.

2 Adjust for differences

The second step in relative valuation is to adjust the multiples for any significant differences between your target company and its peers. For example, if you are valuing a company in a high-growth emerging market, you may need to adjust its P/E multiple for its higher expected earnings growth rate, or use a forward P/E instead of a trailing P/E. Similarly, if you are valuing a company in a highly regulated industry, you may need to adjust its EV/EBITDA multiple for its higher capital expenditures, or use a normalized EBITDA instead of a reported EBITDA. These adjustments will help you to eliminate any distortions or biases in the multiples and make them more comparable.

3 Apply the multiples

The third step in relative valuation is to apply the adjusted multiples to your target company's financial performance to estimate its market value. For example, if you have calculated an average adjusted P/E multiple of 15 for a peer group of similar companies, and your target company has earnings per share of $2, you can estimate its market value per share as 15 x $2 = $30. You can also use a range of multiples or a weighted average of multiples to account for any variability or uncertainty in the peer group. The final result will give you an indication of what the market is willing to pay for your target company based on its relative performance.

4 Consider the limitations

The fourth step in relative valuation is to consider the limitations and challenges of this method, and how to overcome them. One of the main limitations of relative valuation is that it assumes that the market is efficient and reflects the true value of the companies. However, this may not be the case, especially in volatile or irrational markets, where the multiples may be influenced by factors such as sentiment, speculation, or bubbles. Another limitation is that it may be difficult to find a suitable peer group that matches your target company's characteristics, especially in niche or diversified sectors, where the companies may have different products, customers, or strategies. To overcome these limitations, you should use multiple sources of data, cross-check your results with other valuation methods, and apply your own judgment and common sense.

6 Learn more about relative valuation

The sixth and final step in relative valuation is to learn more about this method and how to improve your skills and knowledge. Relative valuation is a widely used and practical tool for company valuation, but it also requires careful analysis, interpretation, and adjustment. You can learn more about relative valuation by reading books, articles, reports, or blogs on this topic, or by taking online courses, webinars, or workshops. You can also practice your relative valuation skills by using online tools, calculators, or databases that provide data and multiples for various companies and industries.

7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?