Firm value is generally defined as the present value of expected cash flows accruing to investors, discounted at the appropriate risk adjusted rate of return.
On a theoretical level, valuation multiples are essentially derivations of fundamental equity/firm valuation models. For more information on how to derive certain Enterprise Value ("EV") multiples directly from related firm valuation models, click on:
Valuation Multiples: A Primer [UBS]
The multiples method in corporate and business valuation is categorised as a market-based valuation approach. Establishing an indicative estimation of firm value using the multiples method involves applying a synthetic market valuation multiple (e.g. EV/Revenue or EV/EBITDA), to an associated value driver of the firm being valued (e.g. the target firm’s Revenue or EBITDA).
A synthetic valuation multiple is typically determined by reference to a group (or groups) of comparable firms within the same (or related) industry.
International Private Equity and Venture Capital Valuation Guidelines (the "IPEV Guidelines") suggests that the multiples approach for valuation
"...is likely to be appropriate for an Investment in an established business with an identifiable stream of continuing earnings or revenue that is considered to be maintainable."
As a consequence of the role of financial structuring in private equity, the IPEV Guidelines recommends the use of Enterprise Value multiples in the determination of Fair Value:
"...multiples should be used to derive an Enterprise Value for the Underlying Business."
We note that although the IPEV Guidelines states
"...value is by definition a forward-looking concept..."
, whereby quoted markets generally evaluate firm value in relation to 'current' and 'forecast' multiples, rather than by reference to 'historical' valuation multiples, the IPEV Guidelines recognises that there exists
"...a trade-off between the reliability and relevance of the..." revenue and earnings figures available from the target company being valued.
As a result of this trade-off, the IPEV Guidelines suggests that
"...while it remains a matter of judgement... a Market Participant perspective should be used either focused on historical earnings or focused on future earnings based on the availability and reliability of forward looking projections and multiples or historical results and multiples."
eval.tech ("eVal" or the "Website") provide trailing peer company Enterprise Value (EV) and Market Capitalisation ("Market Cap") valuation multiples, including EV/Revenue, EV/EBITDA, and P/E multiples. Users can retrieve peer company valuation multiples by Standard Industry Classification (SIC) group or by selecting relevant peer companies to create a user-defined peer group, as required.
To download comparable company valuation multiples at selected dates, click
here.
Users can download and retrieve the following trailing peer company valuation multiples, at current and historical dates:
| Enterprise Value Multiples | Market Cap Multiples |
|---|---|
| EV/Revenue | P/E |
| EV/EBITDA | P/(E + D&A) |
| EV/EBIT | P/EBT |
| EV/Total Assets | P/BV |
| EV/Tangible Assets | |
| EV/(Total Debt + Shareholders' Equity) | |
| EV/CFO |
We note that the IPEV Guidelines suggests that
"It is important that the earnings multiple of each comparable company is adjusted for points of difference between the comparable company and the company being valued."
As result of this recommendation, eVal offer regression analyses relating to the following valuation multiples:
We regress each valuation multiple against various relevant financial metrics, to determine whether there exists a linear relationship between the peer company multiples versus the underlying financial metrics of the peer group companies.
The revenue multiple is generally useful for valuing firms with negative earnings. It is less susceptible to accounting distortions and is not readily or easily available for manipulation by firm management. The traditional revenue multiple approach in valuation is typically useful for valuing cyclical businesses and firms operating in mature industries.
Although, we note that revenue/sales multiples are less volatile than other multiples such as Price/Earnings ("P/E"), the revenue multiple can be manipulated by utilising aggressive or misleading revenue recognition practices that distort a company’s headline revenue number. In addition, given that the sales multiple inherently excludes firm costs, the multiple does not therefore capture differences in cost structure and overall firm profitability, which can lead to ascribing comparatively high valuations to firms with high revenues but low (or negative) profitability relative to other firms in the same industry.
To consider the different measures of firm profitability and operating risk, eVal regress the revenue multiple against the following financial metrics to determine if a linear relationship exists:
| Independent Variables | |
|---|---|
| EBITDA Margin | Interest Coverage |
| EBIT Margin | Debt-Equity Ratio |
| ROA (EBITDA) | Asset Turnover |
| ROA (EBIT) | Tangible Asset Turnover |
We summarise the expected linear regression relationships between the EV/Revenue multiple and selected financial metrics (i.e. versus selected independent variables):
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The Earnings Before Interest, Tax, Depreciation and Amortisation ("EBITDA") Margin is used to determine firm operating profitability as a percentage of sales/revenue. It is used to help establish the level of operating cash that is generated for each unit of revenue and helps to establish firm operating efficiency and comparative profitability. Earnings Before Interest, and Tax ("EBIT"), is similar to EBITDA, although it includes the non-cash accounting effects of firm depreciation and amortisation.
The EV/Revenue multiple versus EBITDA Margin regression analysis is expected to exhibit a positive linear relationship, where a higher EBITDA Margin should result in a comparatively higher EV/Revenue valuation multiple, all things being equal.
Given that EBIT and EBITDA are related, the EV/Revenue multiple versus EBIT Margin regression analysis is also expected to exhibit a positive linear relationship, where a higher EBIT Margin should result in a comparatively higher EV/Revenue valuation multiple, all things being equal.
Companies with high EBIT(DA) margins are generally expected to command higher EV/Revenue multiples compared to other firms within the same industry, because firms with higher EBITDA margin generate greater levels of operating cash for each unit of revenue; consequently, because such companies display superior levels of operating efficiency, they are comparatively more likely to generate greater firm profits per unit of revenue.
Our preliminary research demonstrates that there is strong evidence to suggest that company EBIT(DA) margin is an important driver of industry EV/Revenue valuation multiples.
Our analysis suggests that, when valuing a firm with comparatively higher EBIT(DA) margin, utilising an average industry EV/Revenue multiple in valuation will potentially undervalue the target company, because the valuation may not account for the target firm's superior operating efficiency.
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Return on Assets ("ROA") is a firm profitability ratio used to determine the percentage of profit a company earns relative to total assets. ROA is ordinarily defined as net income divided by total assets.
As a consequence of regressing firm profitability measures against Enterprise Value multiples, and since total assets are defined at firm enterprise level (whereas net income is defined at equity level), to ensure that numerator and denominator are consistently defined at an overall firm enterprise level, eVal utilise EBIT(DA) ROA – defined as EBIT(DA) divided by total assets (or equivalently, EBIT(DA) as a percentage of total assets).
The EV/Revenue multiple versus ROA (EBITDA) regression analysis is expected to exhibit a positive linear relationship, where a higher ROA (EBITDA) should result in a comparatively higher EV/Revenue valuation multiple, all things being equal.
Given that EBIT and EBITDA are related, the EV/Revenue multiple versus ROA (EBIT) regression analysis is also expected to exhibit a positive linear relationship, where a higher ROA (EBIT) should result in a comparatively higher EV/Revenue valuation multiple, all things being equal.
Our preliminary research demonstrates that there is strong evidence to suggest that company ROA EBIT(DA) is an important driver of industry EV/Revenue valuation multiples.
Our analysis suggests that, when valuing a firm with comparatively higher ROA (EBIT(DA)) margin, utilising an average industry EV/Revenue multiple in valuation will potentially undervalue the target company, because the valuation may not account for the target company's ability to generate increased EBIT(DA) per unit of total assets.
The total asset multiple is commonly utilised for industries which are asset-intensive; although, the multiple is also useful for valuing firms with negative earnings. Using the total asset multiple is particularly advantageous where a business is predominantly asset-driven, and where return-on-assets (ROA) is largely consistent, as this allows base assets to serve as a proxy and appropriate indicator of future cash flows.
Enterprise Value to Assets is calculated as the enterprise value of a company divided by its total assets. The multiple offers a distinct perspective of company value by considering its total assets against its actual worth, as measured by enterprise value. The total assets multiple serves as a useful indicator of firm value, because assets are generally less volatile than earnings, and they tend to be more stable and enduring over time.
Although total assets are typically less volatile than earnings, the presence of intangible assets (and the underlying assumptions that may underpin the value of these intangibles) can result in bias, and therefore lead to ascribing greater value to firms with comparatively high intangible assets. In addition, when utilising the total assets multiple, fixed assets may also need investigation, because without appropriate consideration for current asset values (compared to reported asset values), the use of the total asset multiple may lead to an inconsistent valuation.
To consider the different measures of firm profitability and operating risk, eVal regress the total assets multiple against the following financial metrics to determine if a linear relationship exists:
| Independent Variables | |
|---|---|
| Asset Turnover | ROCE (EBIT) |
| ROA (EBITDA) | Debt-Equity Ratio |
| ROA (EBIT) | Debt-BV |
| ROCE (EBITDA) | WC-to-Total Assets |
We summarise the expected linear regression relationships between the EV/Total Assets multiple and selected financial metrics (i.e. versus selected independent variables):
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Return on Assets ("ROA") is a firm profitability ratio used to determine the percentage of profit a company earns relative to total assets. ROA is ordinarily defined as net income divided by total assets.
As a consequence of regressing firm profitability measures against Enterprise Value multiples, and since total assets are defined at firm enterprise level (whereas net income is defined at equity level), to ensure that numerator and denominator are consistently defined at an overall firm enterprise level, eVal utilise EBIT(DA) ROA – defined as EBIT(DA) divided by total assets (or equivalently, EBIT(DA) as a percentage of total assets).
The EV/Total Assets multiple versus ROA (EBITDA) regression analysis is expected to exhibit a positive linear relationship, where a higher ROA (EBITDA) should result in a comparatively higher EV/Total Assets valuation multiple, all things being equal.
Given that EBIT and EBITDA are related, the EV/Total Assets multiple versus ROA (EBIT) regression analysis is also expected to exhibit a positive linear relationship, where a higher ROA (EBIT) should result in a comparatively higher EV/Total Assets valuation multiple, all things being equal.
Our preliminary research demonstrates that there is strong evidence to suggest that company ROA EBIT(DA) is an important driver of industry EV/Total Assets valuation multiples.
Our analysis suggests that, when valuing a firm with comparatively higher ROA EBIT(DA), utilising an average industry EV/Total Assets multiple may potentially undervalue the target company, because the synthetic valuation multiple utilised may not sufficiently account for the target company's relative strength in generating greater EBIT(DA) per unit of total assets.
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Return on Capital Employed ("ROCE") is a company profitability ratio useful for evaluating a firm’s success and efficiency in deploying its capital resources. ROCE is a principal indicator of company productivity and overall firm performance.
Capital employed is a general term that refers to the investment capital resources available to a company, and generally represents the available operating capital that enables a firm’s typical operations. Capital employed can be calculated in various ways, and essentially helps demonstrate the funding being utilised during a company’s typical operating cycle.
A straightforward depiction of capital employed would be total assets minus current liabilities; equivalently, at eVal we calculate capital employed as Shareholders’ Equity plus Net Debt.
The ROCE ratio details firm profitability per unit of employed capital. A higher ROCE indicates a more effective use of firm capital to generate operating profit. ROCE should generally be greater than a company’s cost of capital, otherwise this could signal that the company is not effective at creating shareholder value, as increases in capital would result in an overall reduction in general company profitability.
The EV/Total Assets multiple versus ROCE (EBITDA) regression analysis is expected to exhibit a positive linear relationship, where a higher ROCE (EBITDA) should result in a comparatively higher EV/Total Assets valuation multiple, all things being equal.
The EV/Total Assets multiple versus ROCE (EBIT) regression analysis is also expected to exhibit a positive linear relationship, where a higher ROCE (EBIT) should result in a comparatively higher EV/Total Assets valuation multiple, all things being equal.
Our preliminary research demonstrates that there is strong evidence to suggest that company ROCE (EBIT(DA)) is an important driver of industry EV/Total Assets valuation multiples.
Our analysis suggests that, when valuing a firm with comparatively higher ROCE (EBIT(DA)), utilising the average industry EV/Total Assets multiple could potentially undervalue the target company, because the valuation multiple utilised may not fully reflect the firm’s comparative efficiency and strength in generating superior returns per unit of capital employed.
The tangible asset multiple is similar to the total assets multiple; however, the tangible asset multiple excludes recorded goodwill and other intangible assets from the denominator in its calculation. Tangible assets include customary fixed assets such as machinery, land and buildings; and also current assets, such as firm inventory.
As per International Financial Reporting Standards 3 ("IFRS 3"): Business Combinations, only acquired intangible assets are separately disclosed on the acquiring company’s consolidated balance sheet, as current accounting practices do not commonly permit for internally generated intangible assets to be separately disclosed.
Since the valuation of intangible assets can be relatively complex and variable in nature, and given that the assessment of intangible assets can require a considerable amount of subjective judgment, there is obvious potential for intangible assets to be incorrectly specified and quantified on a company’s balance sheet. In addition, inappropriate impairment and amortisation of certain intangible assets can result in overstating current values, leading to biased valuations.
Utilising tangible assets instead of total assets can help remedy some of the drawbacks associated with the EV/Total Assets multiple, namely, the inclusion of goodwill and other identifiable intangible assets on the balance sheet. Consistent with the total assets multiple, the tangible asset multiple is commonly utilised for industries which are asset-intensive, and is also useful for valuing firms with negative earnings. The EV/Tangible Assets multiple offers a distinct perspective of company value by considering its tangible assets against enterprise value.
To consider the different measures of firm profitability and operating risk, eVal regress the tangible assets multiple against the following financial metrics to determine if a linear relationship exists:
| Independent Variables | |
|---|---|
| Tangible Asset Turnover | ROTCE (EBIT) |
| ROTA (EBITDA) | Debt-Equity Ratio |
| ROTA (EBIT) | Debt-BV |
| ROTCE (EBITDA) | WC-to-Tangible Assets |
We summarise the expected linear regression relationships between the EV/Tangible Assets multiple and selected financial metrics (i.e. the independent variables):
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Return on Tangible Assets (ROTA) is a firm profitability ratio used to determine the percentage of profit a company earns relative to Tangible Assets. ROTA is ordinarily defined as net income divided by Tangible Assets.
Given that we are regressing firm profitability measures against Enterprise Value multiples, and since Tangible Assets are defined at firm enterprise level (whereas net income is defined at equity level), to ensure that numerator and denominator are consistently defined at an overall firm enterprise level, eVal utilise EBIT(DA) ROTA – defined as EBIT(DA) divided by Tangible Assets (or equivalently, EBIT(DA) as a percentage of Tangible Assets).
The EV/Tangible Assets multiple versus ROTA (EBITDA) regression analysis is expected to exhibit a positive linear relationship, where a higher ROTA (EBITDA) should result in a comparatively higher EV/Tangible Assets valuation multiple, all things being equal.
The EV/Tangible Assets multiple versus ROTA (EBIT) regression analysis is also expected to exhibit a positive linear relationship, where a higher ROTA (EBIT) should result in a comparatively higher EV/Tangible Assets valuation multiple, all things being equal.
Our preliminary research demonstrates that there is strong evidence to suggest that company ROTA (EBIT(DA)) is an important driver of industry EV/Tangible Assets valuation multiples.
Our analysis suggests that, when valuing a firm with comparatively high ROTA (EBIT(DA)), utilising an average industry EV/Tangible Assets multiple will potentially undervalue the target company, because the synthetic valuation multiple used may not sufficiently account for the target company's relative strength in generating greater EBIT(DA) per unit of tangible assets.