Relative Valuation (Multiples)
Unlike intrinsic valuation, which attempts to determine absolute value, relative valuation determines how an asset is priced relative to similar assets in the market.
Enterprise Value Multiples
Enterprise Value (EV) represents the total value of the firm's operations, irrespective of its capital structure. Therefore, it must be compared to operating metrics (pre-debt).
EV / EBITDA
The most widely used multiple in institutional finance and M&A. It acts as a proxy for operating cash flow yield.
EV / Revenue
Used primarily for early-stage or high-growth software (SaaS) companies that have negative EBITDA. Assumes eventual profitability at scale.
Equity Multiples
Equity value represents the residual claim belonging to shareholders. It is compared to metrics post-debt service.
Price to Earnings (P/E)
Market Cap / Net Income. Susceptible to accounting manipulation and capital structure distortion. The "Forward P/E" uses next year's estimated earnings.
Price to Book (P/B)
Market Cap / Shareholders' Equity. Highly relevant for financial institutions (banks, insurance) whose assets are marked to market.
The Comparable Company Analysis (Comps)
The core of relative valuation is building a "comps set"—a group of publicly traded companies with similar business models, growth profiles, risk, and capital requirements. The target company is then valued at the median or mean multiple of the set.
Common Errors
- ✗ Mismatching numerator and denominator (e.g., EV / Net Income, or Price / EBITDA).
- ✗ Failing to adjust for non-recurring/extraordinary items in EBITDA.
- ✗ Using trailing metrics instead of forward (NTM - Next Twelve Months) metrics in forward-looking markets.