30 years: Corporate Valuations
In this video in the series on corporate valuations, Sarah introduces enterprise value multiples and first covers the background to multiple valuations and then walks us through the process of carrying out a multiple valuation.
In this video in the series on corporate valuations, Sarah introduces enterprise value multiples and first covers the background to multiple valuations and then walks us through the process of carrying out a multiple valuation.
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6 mins 47 secs
A multiple valuation simply involves multiplying a company’s financial variable, such as EBITDA or net profit by a corresponding multiple or ratio observed in a peer group of similar firms. The main benefit of a multiple valuation is that it allows us to estimate valuations without having to go through the rigour of a DCF calculation. It is important to understand the the background to it along with the execution.
Key learning objectives:
Understand what are multiple valuations and the background to them
Understand the mechanics of multiple valuations
Comprehend why multiples vary between firms and sectors
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Taking a metric such as a firm’s forecast EBITDA and multiplying this variable by the average or median EBITDA multiple at which a peer group of comparable firms trades gives us an estimate of the EV of a firm. This estimate is produced by using only two variables and hence is straightforward.
Multiples can be used to value a private company or to test whether an existing value is high or low relative to the chosen peer group. It is a relative value method – valuing one firm, based on the current valuation of comparable firms.
Financial factors:
Non-financial factors – Some of the non-financial factors include Poor corporate governance, ineffective management, adverse regulatory changes, a poor track record of M&A, lack of value creation, worsening event risks and geo-political risks, technological threats, a poor innovation record and high customer concentration. A firm may also be impacted by a low free float (only a small percentage of the shares are listed, its trading multiple can be affected)
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