SAPM

Valuation
What Is a Multiple?
A valuation multiple is simply an expression of market value relative to a key statistic
that is assumed to relate to that value. To be useful, that statistic whether earnings,
cash flow or some other measure must bear a logical relationship to the market
value observed; to be seen, in fact, as the driver of that market value.

There are two basic types of multiple enterprise value and equity:
Enterprise multiples express the value of an entire enterprise the value of all claims
on a business relative to a statistic that relates to the entire enterprise, such as
sales or EBIT.

Equity multiples, by contrast, express the value of shareholders claims on the assets
and cash flow of the business. An equity multiple therefore expresses the value of this
claim relative to a statistic that applies to shareholders only, such as earnings (the
residual left after payments to creditors, minority shareholders and other non-equity
claimants).
Value Multiples

Enterprise Value Multiples Equity Value Multiples

EV / EBITDA Price / EPS ("P/E")
EV / EBIT Equity Value / Book Value
P / E / Growth ("PEG
EV / Sales
Ratio")
EV / Unlevered Free Cash

Flow
 Enterprise Value

EV = market value of common stock

+ market value of preferred equity
+ market value of debt
+ minority interest
- cash and investments

Investors mainly use a company's enterprise multiple to determine whether a company is

undervalued or overvalued. A low ratio indicates that a company might be undervalued, and a high
ratio indicates that the company might be overvalued
.
Valuation Basis
Historical valuation multiples are usually calculated over the last twelve month (LTM)
period. To calculate the LTM EBITDA, for example, add the EBITDA from the most recent
period
Most publicly traded companies are valued based on their projected, rather than
historical, earnings and cash flows. Projections, or forward estimates, are made by equity
research analyst estimates, and often averaged for use in calculating valuation multiples.
Forward estimates can be obtained from sources like Bloomberg, First Call, and IBES.
These projections are usually provided on a calendar year basis for consistency, but it is
necessary to verify that all such estimates use the same yearly basis (either calendar or
fiscal) to make apples-to-apples comparisons.
Adjust the denominator to exclude the effects of extraordinary and non-recurring items
such as restructuring charges, one-time gains/losses, accounting changes, legal
settlements, discontinued operations, and asset impairment charges. Also, if non-
controlling interest is excluded from the calculation of EV, the portion of EBITDA and EBIT
attributable to the non-controlling interest should also be excluded from the denominator.
EV/EBITDA
EV/EBITDA is one of the most commonly used valuation
metrics, as EBITDA is commonly used as a proxy for
cash flow available to the firm. EV/EBITDA is often in the
range of 6.0x to 18.0x.
EV/EBIT
When depreciation and amortization expenses are
small, as in the case of a non-capital-intensive company
such as a consulting firm, EV/EBIT and EV/EBITDA will be
similar. Unlike EBITDA, EBIT recognizes that depreciation
and amortization, while non-cash charges, reflect real
expenses associated with the utilization and wear of a
firm's assets that will ultimately need to be replaced.
EV/EBIT is often in the range of 10.0x to 25.0x.
EV/Sales
When a company has negative EBITDA, the EV/EBITDA
and EV/EBIT multiples will not be material. In such
cases, EV/Sales may be the most appropriate multiple
to use. EV/Sales is commonly used in the valuation of
companies whose operating costs still exceed revenues,
as might be the case with nascent Internet firms, for
example. However, revenue is a poor metric by which to
compare firms, since two firms with identical revenues
may have wildly different margins. EV/Sales multiples
are often in the range of 1.00x to 3.00x
Unlevered Free Cash Flow

Unlevered free cash flow (UFCF) is the free cash flow

attributable to all suppliers of capital (shareholders and
debt holders). To calculate UFCF, start with operating
income (EBIT). Note that EBIT is an unlevered figure
because it is calculated before interest expense. Next,
subtract taxes to yield EBIAT [=EBIT(1tax rate)].
Then, add back depreciation expense and subtract
CapEx and the change in net working capital (NWC).
P/E
P/E is one of the most commonly used valuation
metrics, where the numerator is the price of the stock
and the denominator is EPS. Note that the P/E multiple
equals the ratio of equity value to net Income, in which
the numerator and denominator are both are divided by
the number of fully diluted shares. EPS figures may be
either as-reported or adjusted as described below. P/E
multiples are often in the range of 15.0x to 30.0x.
PEG
The PEG ratio is simply the P/E ratio divided by the
expected EPS growth rate, and is often in the range of
0.50x to 3.00x. PEG ratios are more flexible than other
ratios in that they allow the expected level of growth to
vary across companies, making it easier to make
comparisons between companies in different stages of
their life cycles. There is no standard time frame for
measuring expected EPS growth, but practitioners
typically use a long-term, or 5-year, growth rate.
Valuing a Company
When valuing a company, three techniques are commonly used:
Comparable company analysis (or "peer group analysis", "equity
comps", " trading comps", or "public market multiples"),
Precedent transaction analysis (or "transaction comps", "deal comps", or
"private market multiples")
Discounted cash flow ("DCF") analysis.
A fourth type of analysis, a leveraged buyout ("LBO") analysis, is often
used to estimate the amount a financial buyer would pay for a company.
A fifth type of analysis, a sum-of-the-parts ("SOTP" or "break-up")
analysis may be used to value a company as the sum of the values of its
composite businesses.
Comparable Companies
Suppose you are an investment banker positioning a technology-focused third-
party logistics company (your client) for an IPO. The company has no direct
comparables, but can be legitimately positioned as either a pure-play logistics
firm or a business process outsourcing (BPO) company. You expect your client
to trade on an EV/EBITDA multiple. Comparable pure-play logistics companies
currently trade at 8.1x LTM EBITDA, on average. Comparable BPO firms
currently trade at 9.6x, on average.
You would probably want to position your client as a BPO firm to take
advantage of higher EBITDA multiples in that peer group and boost your client's
valuation. 9.6x LTM EBITDA would therefore be your starting point is
determining an appropriate multiple, and you might adjust the multiple upward
if your client has better growth characteristics than comparable BPO firms, or
downward if your client's business model is especially risky, for example.
Comparable Companies

Method Description Comments

Reliability depends on the level of

comparability of the selected publicly traded
companies
Does not include a "control premium"
Calculates a "fully distributed" trading value (though a change of control premium may be
Estimates a company's implied value in the applied to the equity value to estimate a
public equity markets through an analysis of private market value)
Comparab
similar companies' trading and operating
le
metrics
Companie
Apply multiples derived from similar or
s Analysis
"comparable" publicly traded companies to a
company's operating metrics (recognizing
that no two companies are exactly alike)
Precedent Transaction Analysis
Reliability
depends on the
Provides a
number of
private market
precedent
benchmark in a
transactions and
change of control
their levels of
scenario
comparability
Apply multiples
Market cycles
Precedent derived from
and volatility may
Transaction similar or
affect market
Analysis comparable
historical
precedent M&A
valuation levels
transactions to a
Individual buyer
company's
synergies and
operating metrics
structure of
Includes a
transaction will
control premium
also impact
multiples