Company valuation - Comparable trading multiple analysis
20 important questions on Company valuation - Comparable trading multiple analysis
What are the most commonly used valuation multiples?
- Price/sales (P/S)
- Price/earnings (P/E)
- Price/book value (P/B)
- Enterprise-value-to-EBITDA (EV/EBITDA)
Which valuation multiple is the most thourough and comprehensive?
Why is the Price/Sales (P/S) multiple easy to apply but subject to potentially gigantic valuation errors?
However, the multiple assumes that financial structures, margins, taxes, etc. Are literally identical across the whole industry, which is obviously not the case.
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(As a very rough rule of thumb) if a company has a net profit margin of around 10%, what is often a fair price as a Price/Sales?
What is the problem with a P/E multiple if used as a valuation multiple versus a peer group multiple?
Also, this multiple takes accounting profits rather than actual cash flows into account.
What P/E multiples represent a fair value depending on a business' profitability, margin, financial structure, etc?
In order to fairly account for earnings growth, what do analyst often measure to the P/E multiple? Why?
If a share trades at a P/E ratio of 30x, but if its earnings grow at 30%, its PEG ratio is 1x, which is considered fair. Hence, a high P/E ratio is justified for companies with strong earnings growth.
When is Price/Book a reasonable indicator to derive a company's fair value? When it is not?
It is not when a business' predominant asset is human capital, because then the company's book value is literally no indication of its fair value.
Companies that trade at a substantially discounted P/B ratio are seen by the market as highly risky. Why is that?
What does a P/B ratio of 1.0x mean?
What is the difference between enterprise value and market value?
The market value (enterprise value) is the value of a company to its shareholders.
What is EBITDA a good proxy for?
Why could EBIT give you the wrong idea while EBITDA cannot?
Why is EV/EBITDA such a good multiple?
EV takes into account the financial structure of a business as well as liabilities, minority interest, and provisions etc. That are not owned by the equity owners of the business.
What does an EV/EBITDA multiple of below 3.0x mean?
What does an EV/EBITDA multiple of above 10x mean?
When net income is $288 and the company has 100 shares at a price of $45 per share. What is the price/earnings ratio?
$288 / 100 = 2.88
Price/earnings ratio = $45 / 2.88 = 15.63
When common stock is $100 and retained earnings is $775 and there are 100 shares at a price of $45 per share. What is the price/book value?
(100 + 775) / 100 = $8.75
Price/book value = 45 / 8.75 = 5.17
Price multiple valuation of many early-stage tech companies uses which multiple?
A private pharmaceutical company that has $200 million in EBITDA and is financed with $300 million in debt. Using the comparable average of 5.30, the equity of this company would be valued at?
$200 * 5.30 = $1,160 million
Minus debt to get to the equity value
$1,160 - 300 = $760 million equity value
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