The valuation of companies by multiples is a method used in the valuation of companies that helps to calculate the target value of a company.
This method of valuation of companies by multiples does not calculate the absolute or intrinsic value of the company, but rather a range of values relative to other similar companies. It is used to better delimit the range previously obtained using the discounted cash flow method. It is a necessary complement for a good analysis.
To perform this method of valuation of companies by multiples, it is necessary:
Of all these companies that may share characteristics, those that are most closely related and comparable should be chosen.
There really is no such thing as an equal company, which is why we talk about, since this method does not calculate the true value of the company. However, because there are companies that behave similarly in the market, this valuation method can serve as a "proxy" when valuing a realistic range.
Once the selection of these companies has been made, we move on to the second phase where an analysis of all the metrics that may make sense when valuing a company is performed, such as:
Metrics that vary and have to be analyzed personally in each valuation.
Once all these multiples have been calculated, a statistical analysis is carried out to find out which variables really influence the valuation of the company. We seek to find which variables significantly affect this group of companies in the valuation. This analysis is crucial to understand which are the metrics that truly affect the valuation of these comparable companies, since sometimes "typical" variables such as EBITDA or sales are not the factors that most affect the valuation.
The data used for the metrics, both the valuation of the companies and the various financial statements of the comparable companies, can be obtained both from financial information, which must be published periodically by the listed companies, and from data on previous transactions.
Once the hypotheses have been checked and the metrics that work in the sector have been discovered, the average and median of these multiples are calculated.
Normally, the median of these multiples tends to be more interesting, to avoid the effects of those leading or worst valued companies, finding a more realistic valuation. However, one should not disregard the average of the multiples, as they can be used to understand the polarization of the sectors and distinguish strata of comparable companies.
Thanks to these metrics, a valuation range is obtained, which is then applied in a complementary way to the discounted cash flow method, with the aim of better specifying the valuation, i.e., it serves as a complement to achieve a more accurate valuation and also serves as a sanity test, avoiding errors in the assumptions used for the projection.
Even so, the multiples method has certain limitations: