Topic 9; Valuation Multiples
Valuation multiples, also known as price multiples or simply multiples, are financial ratios used to
compare a company’s market value (usually its stock price or enterprise value) to a specific financial
metric.
Types of Valuation Multiples
1. Equity Multiples
2. Enterprise Value Multiples
1.Equity Multiples
. Some common valuation multiples include:
â–ª Price-to-Earnings Ratio (P/E Ratio): The P/E ratio compares a company’s stock price to its
earnings per share (EPS). It is calculated by dividing the current stock price by the earnings per
share.
â–ª Price-to-Book Ratio (P/B Ratio): The P/B ratio compares a company’s market value (equity value)
to its book value (shareholders’ equity). It is calculated by dividing the current stock price by the
book value per share.
â–ª Price-to-Sales Ratio (P/S Ratio): The P/S ratio compares a company’s market value to its total
revenue or sales. It is calculated by dividing the current stock price by the total revenue per
share.
â–ª Enterprise Value-to-EBITDA (EV/EBITDA): The EV/EBITDA ratio compares a company’s enterprise
value (market value of equity plus debt minus cash) to its EBITDA (Earnings Before Interest,
Taxes, Depreciation, and Amortization). It is calculated by dividing enterprise value by EBITDA.
â–ª Dividend Yield: The dividend yield is a ratio that compares a company’s annual dividend per
share to its current stock price. It is calculated by dividing the dividend per share by the stock
price.
2.Enterprise Value Multiples
Enterprise Value (EV) multiples are financial ratios that use the enterprise value (market value of equity
plus debt minus cash) as the numerator to compare a company’s overall value to a specific financial
metric. EV/Revenue:
1. The EV/Revenue ratio compares a company’s enterprise value to its total revenue or sales. It is
calculated by dividing enterprise value by total revenue. This multiple provides insights into how
much investors are willing to pay for each dollar of a company’s revenue.
2. EV/EBITDA: The EV/EBITDA ratio compares a company’s enterprise value to its EBITDA (Earnings
Before Interest, Taxes, Depreciation, and Amortization). It is calculated by dividing enterprise
value by EBITDA.
3. EV/EBIT: Similar to EV/EBITDA, the EV/EBIT ratio compares enterprise value to EBIT (Earnings
Before Interest and Taxes). It is calculated by dividing enterprise value by EBIT.
4. EV/Free Cash Flow: The EV/Free Cash Flow ratio compares a company’s enterprise value to its
free cash flow. It is calculated by dividing enterprise value by free cash flow.
5. EV/Operating Income: The EV/Operating Income ratio compares enterprise value to operating
income (also known as operating profit). It is calculated by dividing enterprise value by
operating income.
6. EV/Net Income: The EV/Net Income ratio compares enterprise value to net income, which is the
company’s profit after all expenses, interest, and taxes. It is calculated by dividing enterprise
value by net income
