登录查看更多内容

How do you determine the appropriate multiples to use in a comparable company analysis for PE valuation?

由人工智能和领英社区提供技术支持

Comparable company analysis (CCA) is a common method of valuing a target company in private equity (PE) transactions. It involves comparing the target's financial metrics with those of similar publicly traded companies and applying appropriate multiples to estimate the target's value. But how do you determine which multiples to use and how to adjust them for different factors? In this article, we will explain the basics of CCA and the steps to select and apply the right multiples for PE valuation.

此文章中的业界达人

由社区从 2 条内容中精选。了解更多

Andrés Oconitrillo

Banquero de Inversión ?? | Director Ejecutivo de Estrategia de Bankaool

1 What are multiples?

Multiples are ratios that express the value of a company relative to some measure of its performance, such as earnings, sales, or assets. They are used to compare the value of different companies based on their common characteristics, such as industry, growth, or profitability. For example, the price-to-earnings (P/E) multiple compares the market value of a company's equity with its earnings, while the enterprise value-to-EBITDA (EV/EBITDA) multiple compares the value of a company's entire business with its earnings before interest, taxes, depreciation, and amortization.

添加您的观点

Andrés Oconitrillo

Banquero de Inversión ?? | Director Ejecutivo de Estrategia de Bankaool
举报内容
Company multiples are financial metrics used to value a business by comparing it to similar companies in the industry. They’re widely used for they simplicity, sine they are are ratios of a company’s financial metrics (like revenue, EBITDA, or net income) to its market value or the transaction value. However these are based on prior transactions and market caps that are valued with different conditions. These are indicative but can be a little misleading when used stand alone. It makes too many assumptions to keep its simplicity.

已翻译

赞

2 How to choose multiples?

When choosing multiples for CCA, there is no definitive answer as different multiples may capture different aspects of a company's value and performance. However, some general criteria to consider include relevance, availability, and consistency. Relevance refers to the multiple reflecting key drivers of value and growth for the industry and target company. Availability means the multiple should be based on data that is readily available and comparable. Consistency means the multiple should be calculated in a consistent way for both the target and peer companies. For example, earnings should be adjusted for non-recurring items and enterprise value should include net debt and minority interests.

添加您的观点

3 How to select peer companies?

The quality of CCA largely depends on the selection of similar peer companies in terms of size, industry, geography, growth, profitability, and risk. Finding perfect peers can be challenging due to possible differences in business models, product lines, customer segments, or competitive advantages. To select peer companies, you should first define the industry and use industry classification codes or databases to find potential peers. Then you should screen for size, performance, geography, and quality. For size, filter out peers that are significantly larger or smaller than the target company based on metrics such as revenue, market capitalization, or assets. For performance, filter out peers that have significantly different growth rates, margins, or returns than the target company based on metrics such as revenue growth, EBITDA margin, or return on equity. For geography, filter out peers that have significantly different geographic exposure than the target company based on metrics such as revenue breakdown, currency risk, or regulatory environment. And for quality, filter out peers that have significantly different quality or risk profiles than the target company based on metrics such as credit ratings, leverage, or liquidity.

添加您的观点

4 How to calculate multiples?

Once the peer companies are selected, the next step is to calculate the multiples for each peer and the target company. This involves taking the market value of equity and dividing it by the earnings per share to get the P/E multiple, or taking the enterprise value and dividing it by EBITDA to get the EV/EBITDA multiple. Market data sources, such as stock prices, market capitalizations, or enterprise values can be used to obtain the value of the company, while financial statements, such as income statements, balance sheets, or cash flow statements can be used to obtain performance measures. However, adjustments may be needed for consistency and comparability. For example, non-recurring items should be excluded from performance measures, while different accounting policies and capital structures should be aligned. Additionally, earnings or cash flow should be unlevering or relevering to reflect the same level of debt or equity.

添加您的观点

Andrés Oconitrillo

Banquero de Inversión ?? | Director Ejecutivo de Estrategia de Bankaool
举报内容
Company multiples calculation is quite simple. It is a reference company value divided by a metric (Sales, EBITDA, or else). It is crucial to be aware that: 1) The target company value reflects investors' expectations on future cashflows, specific capital structure, and market sentiment. 2) Underlying metric may not be normalized by non-recurring or missing items. We often apply a multiple without analyzing the comparability with what we're valuing. I always suggest to calculate a company value based on industry multiples, but also apply other methodologies to arrive to an Enterprise Value and then calculate implied multiples with current metrics. These will help to justify or explain the difference to references multiples.

已翻译

赞

5 How to apply multiples?

After calculating the multiples, the final step is to apply them to the target company to estimate its value. This involves taking the average or median of the peer multiples and multiplying it by the target's performance measure. For example, to estimate the target's equity value using the P/E multiple, multiply the average or median P/E multiple of the peers by the target's earnings per share. To estimate the target's enterprise value using the EV/EBITDA multiple, multiply the average or median EV/EBITDA multiple of the peers by the target's EBITDA. However, some adjustments may be necessary to account for different factors, such as growth, profitability, and risk. A higher or lower multiple can be applied to the target depending on whether it has a higher or lower growth rate than peers (growth premium or discount), a higher or lower profitability than peers (margin premium or discount), or a higher or lower risk than peers (discount rate premium or discount).

添加您的观点