What is multiple-based valuation?
Multiple-based valuation is a method for estimating a company's value by comparing it with similar companies. Instead of projecting future cash flows, you relate the company's price to a metric — such as profit or revenue — and compare the multiple with comparable companies or completed transactions.
Common multiples
- P/E (price-to-earnings) — share price or valuation divided by earnings per share.
- EV/EBITDA — enterprise value divided by operating profit before depreciation and amortisation.
- EV/Sales — enterprise value divided by revenue, common for companies that are not yet profitable.
Valuing unlisted companies with multiples
For unlisted companies there is no ongoing market price, so multiples are often taken from comparable listed companies or from prices in earlier funding rounds and deals. The method is quick and intuitive, but its accuracy depends on how comparable the companies really are. It is therefore often combined with other methods, such as a discounted cash flow valuation.