There are two main methods of valuation of companies: methods based on discounted cash flows (DCF) and methods based on multipliers. This note focuses on the second type. The valuation methods that use multiples are based on identifying companies similar to the ones we want to evaluate. These similar companies are called “Comparable Companies”, “Comparable Companies” or simply “Comps”. Multiple valuation is based on the assumption that markets value equivalent assets similarly and therefore the value of a company can be derived by calculating the market value of comparable companies. A comparable company is a company that operates in the same industry and has similar key financial parameters (i.e. growth and profitability) as the company we wish to evaluate. To be able to compare companies, we use “multiples”, in which the value of a company (for example, the price of its shares or the total value of the company) is related to a financial element (for example, its earnings, EBITDA or sales). Frequently used multipliers are the price / earnings ratio (PER or PER), the ratio of the company’s value to EBITDA (multiple EV / EBITDA or EBITDA), and the ratio of the company’s value to sales.
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