This document discusses using multiples for company valuation and provides guidance on properly applying multiples analysis. It addresses that multiples analysis can improve cash flow forecasts and test DCF valuations by comparing a company's multiples to peers. Key points covered include choosing appropriate comparable companies, using enterprise value multiples based on forward-looking data, and adjusting for non-operating items to build effective multiples. Following best practices in multiples analysis can provide valuable insights, while poor analysis may lead to confusion or misleading conclusions.
PYA Presents Adjusting Valuation Multiples at NACVAPYA, P.C.
PYA Consultant Will Hamilton was a featured speaker at NACVA, Georgia Chapter. His presentation, “Market Approach: Adjusting Valuation Multiples,” outlined methods for adjusting guideline valuation multiples for size, growth, and company-specific risk.
PYA Presents Adjusting Valuation Multiples at NACVAPYA, P.C.
PYA Consultant Will Hamilton was a featured speaker at NACVA, Georgia Chapter. His presentation, “Market Approach: Adjusting Valuation Multiples,” outlined methods for adjusting guideline valuation multiples for size, growth, and company-specific risk.
• B-Toto is worth a bet now as i) its core gaming operations remained resilient even
during the post-CNY off-peak period and appear likely to surpass our 6-7% gaming
revenue growth target for FY4/09, ii) 2009’s special draw allocations for all three
NFOs could take place over the next few weeks and iii) there is upside potential to its
6-8% gross dividend yield based on its policy of a minimum payout of 75% if B-Toto
dishes out higher dividends to lend its parent a helping hand.
• Adjusting earnings but implied yields still decent. We raise our FY09-11’s
revenue per draw growth assumptions by 2-4% pts following the stronger-thanexpected
YTD showing. But FY10-11’s bottomline is lowered by 4-5% as we also
raise our blended prize payout assumption from 62-64% to 63-64% to better reflect
the payout trends seen so far. FY09’s numbers are largely intact despite these
adjustments. Even after a 3-5% cut in our FY10-11 DPS projections (unchanged
80% payout ratio), our forecasts still imply a decent yield.
• Reiterate OUTPERFORM. Our DPS downgrades trim our end-CY09 target price
from RM5.95 to RM5.65, based on an unchanged 5% discount to its DDM value. We
continue to like B-Toto for its steady, low-risk topline growth, superior ROEs and
sustainable dividend yields. Being a low-beta stock, B-Toto may fall out of favour in a
rising market. However, we flag the likelihood of bumper dividends over the short
term. This is a potential share price catalyst that underpins our OUTPERFORM
recommendation, along with the normalisation of luck factor and market share gains.
The presentation below was given by Senior Planner, Tim Jones, and RPM Head of Production and Artwork, Rory Sloan, at this year's Confex event, when asked to address the topic of creativity in the events industry. Now, clearly, the title is designed to provoke. But the more we lived with the contention that there is no such thing as an original idea, the more true it began to seem.
A slight evolution (driven mainly by modesty) proposed that “…there is only the orginal application of an idea.”
This forced us to put our money where our mouth is and attempt to provide an RPM step by step guide to great ideas.
The deck offers six steps to help ‘turn inspiration into ideas of value’ and uses RPM and external agency case studies to illustrate.
It is far from prefect but it hopefully stimulates some thought and further discussion. Enjoy.
• B-Toto is worth a bet now as i) its core gaming operations remained resilient even
during the post-CNY off-peak period and appear likely to surpass our 6-7% gaming
revenue growth target for FY4/09, ii) 2009’s special draw allocations for all three
NFOs could take place over the next few weeks and iii) there is upside potential to its
6-8% gross dividend yield based on its policy of a minimum payout of 75% if B-Toto
dishes out higher dividends to lend its parent a helping hand.
• Adjusting earnings but implied yields still decent. We raise our FY09-11’s
revenue per draw growth assumptions by 2-4% pts following the stronger-thanexpected
YTD showing. But FY10-11’s bottomline is lowered by 4-5% as we also
raise our blended prize payout assumption from 62-64% to 63-64% to better reflect
the payout trends seen so far. FY09’s numbers are largely intact despite these
adjustments. Even after a 3-5% cut in our FY10-11 DPS projections (unchanged
80% payout ratio), our forecasts still imply a decent yield.
• Reiterate OUTPERFORM. Our DPS downgrades trim our end-CY09 target price
from RM5.95 to RM5.65, based on an unchanged 5% discount to its DDM value. We
continue to like B-Toto for its steady, low-risk topline growth, superior ROEs and
sustainable dividend yields. Being a low-beta stock, B-Toto may fall out of favour in a
rising market. However, we flag the likelihood of bumper dividends over the short
term. This is a potential share price catalyst that underpins our OUTPERFORM
recommendation, along with the normalisation of luck factor and market share gains.
The presentation below was given by Senior Planner, Tim Jones, and RPM Head of Production and Artwork, Rory Sloan, at this year's Confex event, when asked to address the topic of creativity in the events industry. Now, clearly, the title is designed to provoke. But the more we lived with the contention that there is no such thing as an original idea, the more true it began to seem.
A slight evolution (driven mainly by modesty) proposed that “…there is only the orginal application of an idea.”
This forced us to put our money where our mouth is and attempt to provide an RPM step by step guide to great ideas.
The deck offers six steps to help ‘turn inspiration into ideas of value’ and uses RPM and external agency case studies to illustrate.
It is far from prefect but it hopefully stimulates some thought and further discussion. Enjoy.
Our largest creative PR op to date published in one of our key target publications today. As part of The Grocer's largest annual supplement ’The Dairymen’ looking at challenges facing the industry we were tasked with creating a generic 21st century milk marketing campaign that addressed the under indexing and declining sales of milk especially amongst millennials.
URBAN TRIBES AND URBANITE EMOTIONS - Fluid, hyper-connected and highly person...RPM
Former music journalist, James Poletti, now head of digital strategy at top experiential agency RPM, plus RPM's head of strategy John Viccars, will talk through the trends shaping today's and tomorrow's urban consumer. They'll share how big brands are tapping into trend-setting urban tribes and communicating with them in their language to create compelling campaigns that become part of something more - delivering not just results but a creative and culturally significant legacy.
Read more at http://advertisingweek.eu/calendar/#oJs3cOsvJogwMFKu.99
DuPont analysis is a useful technique to break down the different return on equity (ROE) generators. The ROE decomposition helps investors to concentrate separately on key indicators of financial success to define strengths and weaknesses.
Three main financial metrics drive equity return (ROE): operating performance, asset usage performance, and financial leverage. Operating output is a net profit margin or a net income separated by overall revenue or profits.
The efficiency of asset usage is determined by the turnover ratio of the assets. Leverage is calculated by the equity multiplier, equal to average assets divided by average equities.
The component parts of a firm's return on equity (ROE) are calculated using a DuPont analysis. This allows an investor to assess, which financial activities contribute the most to the ROE changes
how to sell pi coins at high rate quickly.DOT TECH
Where can I sell my pi coins at a high rate.
Pi is not launched yet on any exchange. But one can easily sell his or her pi coins to investors who want to hold pi till mainnet launch.
This means crypto whales want to hold pi. And you can get a good rate for selling pi to them. I will leave the telegram contact of my personal pi vendor below.
A vendor is someone who buys from a miner and resell it to a holder or crypto whale.
Here is the telegram contact of my vendor:
@Pi_vendor_247
how to sell pi coins in South Korea profitably.DOT TECH
Yes. You can sell your pi network coins in South Korea or any other country, by finding a verified pi merchant
What is a verified pi merchant?
Since pi network is not launched yet on any exchange, the only way you can sell pi coins is by selling to a verified pi merchant, and this is because pi network is not launched yet on any exchange and no pre-sale or ico offerings Is done on pi.
Since there is no pre-sale, the only way exchanges can get pi is by buying from miners. So a pi merchant facilitates these transactions by acting as a bridge for both transactions.
How can i find a pi vendor/merchant?
Well for those who haven't traded with a pi merchant or who don't already have one. I will leave the telegram id of my personal pi merchant who i trade pi with.
Tele gram: @Pi_vendor_247
#pi #sell #nigeria #pinetwork #picoins #sellpi #Nigerian #tradepi #pinetworkcoins #sellmypi
The Evolution of Non-Banking Financial Companies (NBFCs) in India: Challenges...beulahfernandes8
Role in Financial System
NBFCs are critical in bridging the financial inclusion gap.
They provide specialized financial services that cater to segments often neglected by traditional banks.
Economic Impact
NBFCs contribute significantly to India's GDP.
They support sectors like micro, small, and medium enterprises (MSMEs), housing finance, and personal loans.
how to sell pi coins on Bitmart crypto exchangeDOT TECH
Yes. Pi network coins can be exchanged but not on bitmart exchange. Because pi network is still in the enclosed mainnet. The only way pioneers are able to trade pi coins is by reselling the pi coins to pi verified merchants.
A verified merchant is someone who buys pi network coins and resell it to exchanges looking forward to hold till mainnet launch.
I will leave the telegram contact of my personal pi merchant to trade with.
@Pi_vendor_247
Poonawalla Fincorp and IndusInd Bank Introduce New Co-Branded Credit Cardnickysharmasucks
The unveiling of the IndusInd Bank Poonawalla Fincorp eLITE RuPay Platinum Credit Card marks a notable milestone in the Indian financial landscape, showcasing a successful partnership between two leading institutions, Poonawalla Fincorp and IndusInd Bank. This co-branded credit card not only offers users a plethora of benefits but also reflects a commitment to innovation and adaptation. With a focus on providing value-driven and customer-centric solutions, this launch represents more than just a new product—it signifies a step towards redefining the banking experience for millions. Promising convenience, rewards, and a touch of luxury in everyday financial transactions, this collaboration aims to cater to the evolving needs of customers and set new standards in the industry.
The secret way to sell pi coins effortlessly.DOT TECH
Well as we all know pi isn't launched yet. But you can still sell your pi coins effortlessly because some whales in China are interested in holding massive pi coins. And they are willing to pay good money for it. If you are interested in selling I will leave a contact for you. Just telegram this number below. I sold about 3000 pi coins to him and he paid me immediately.
Telegram: @Pi_vendor_247
Financial Assets: Debit vs Equity Securities.pptxWrito-Finance
financial assets represent claim for future benefit or cash. Financial assets are formed by establishing contracts between participants. These financial assets are used for collection of huge amounts of money for business purposes.
Two major Types: Debt Securities and Equity Securities.
Debt Securities are Also known as fixed-income securities or instruments. The type of assets is formed by establishing contracts between investor and issuer of the asset.
• The first type of Debit securities is BONDS. Bonds are issued by corporations and government (both local and national government).
• The second important type of Debit security is NOTES. Apart from similarities associated with notes and bonds, notes have shorter term maturity.
• The 3rd important type of Debit security is TRESURY BILLS. These securities have short-term ranging from three months, six months, and one year. Issuer of such securities are governments.
• Above discussed debit securities are mostly issued by governments and corporations. CERTIFICATE OF DEPOSITS CDs are issued by Banks and Financial Institutions. Risk factor associated with CDs gets reduced when issued by reputable institutions or Banks.
Following are the risk attached with debt securities: Credit risk, interest rate risk and currency risk
There are no fixed maturity dates in such securities, and asset’s value is determined by company’s performance. There are two major types of equity securities: common stock and preferred stock.
Common Stock: These are simple equity securities and bear no complexities which the preferred stock bears. Holders of such securities or instrument have the voting rights when it comes to select the company’s board of director or the business decisions to be made.
Preferred Stock: Preferred stocks are sometime referred to as hybrid securities, because it contains elements of both debit security and equity security. Preferred stock confers ownership rights to security holder that is why it is equity instrument
<a href="https://www.writofinance.com/equity-securities-features-types-risk/" >Equity securities </a> as a whole is used for capital funding for companies. Companies have multiple expenses to cover. Potential growth of company is required in competitive market. So, these securities are used for capital generation, and then uses it for company’s growth.
Concluding remarks
Both are employed in business. Businesses are often established through debit securities, then what is the need for equity securities. Companies have to cover multiple expenses and expansion of business. They can also use equity instruments for repayment of debits. So, there are multiple uses for securities. As an investor, you need tools for analysis. Investment decisions are made by carefully analyzing the market. For better analysis of the stock market, investors often employ financial analysis of companies.
how can I sell pi coins after successfully completing KYCDOT TECH
Pi coins is not launched yet in any exchange 💱 this means it's not swappable, the current pi displaying on coin market cap is the iou version of pi. And you can learn all about that on my previous post.
RIGHT NOW THE ONLY WAY you can sell pi coins is through verified pi merchants. A pi merchant is someone who buys pi coins and resell them to exchanges and crypto whales. Looking forward to hold massive quantities of pi coins before the mainnet launch.
This is because pi network is not doing any pre-sale or ico offerings, the only way to get my coins is from buying from miners. So a merchant facilitates the transactions between the miners and these exchanges holding pi.
I and my friends has sold more than 6000 pi coins successfully with this method. I will be happy to share the contact of my personal pi merchant. The one i trade with, if you have your own merchant you can trade with them. For those who are new.
Message: @Pi_vendor_247 on telegram.
I wouldn't advise you selling all percentage of the pi coins. Leave at least a before so its a win win during open mainnet. Have a nice day pioneers ♥️
#kyc #mainnet #picoins #pi #sellpi #piwallet
#pinetwork
how can i use my minded pi coins I need some funds.DOT TECH
If you are interested in selling your pi coins, i have a verified pi merchant, who buys pi coins and resell them to exchanges looking forward to hold till mainnet launch.
Because the core team has announced that pi network will not be doing any pre-sale. The only way exchanges like huobi, bitmart and hotbit can get pi is by buying from miners.
Now a merchant stands in between these exchanges and the miners. As a link to make transactions smooth. Because right now in the enclosed mainnet you can't sell pi coins your self. You need the help of a merchant,
i will leave the telegram contact of my personal pi merchant below. 👇 I and my friends has traded more than 3000pi coins with him successfully.
@Pi_vendor_247
Introduction to Indian Financial System ()Avanish Goel
The financial system of a country is an important tool for economic development of the country, as it helps in creation of wealth by linking savings with investments.
It facilitates the flow of funds form the households (savers) to business firms (investors) to aid in wealth creation and development of both the parties
where can I find a legit pi merchant onlineDOT TECH
Yes. This is very easy what you need is a recommendation from someone who has successfully traded pi coins before with a merchant.
Who is a pi merchant?
A pi merchant is someone who buys pi network coins and resell them to Investors looking forward to hold thousands of pi coins before the open mainnet.
I will leave the telegram contact of my personal pi merchant to trade with
@Pi_vendor_247
what is the best method to sell pi coins in 2024DOT TECH
The best way to sell your pi coins safely is trading with an exchange..but since pi is not launched in any exchange, and second option is through a VERIFIED pi merchant.
Who is a pi merchant?
A pi merchant is someone who buys pi coins from miners and pioneers and resell them to Investors looking forward to hold massive amounts before mainnet launch in 2026.
I will leave the telegram contact of my personal pi merchant to trade pi coins with.
@Pi_vendor_247
when will pi network coin be available on crypto exchange.DOT TECH
There is no set date for when Pi coins will enter the market.
However, the developers are working hard to get them released as soon as possible.
Once they are available, users will be able to exchange other cryptocurrencies for Pi coins on designated exchanges.
But for now the only way to sell your pi coins is through verified pi vendor.
Here is the telegram contact of my personal pi vendor
@Pi_vendor_247
Exploring Abhay Bhutada’s Views After Poonawalla Fincorp’s Collaboration With...beulahfernandes8
The financial landscape in India has witnessed a significant development with the recent collaboration between Poonawalla Fincorp and IndusInd Bank.
The launch of the co-branded credit card, the IndusInd Bank Poonawalla Fincorp eLITE RuPay Platinum Credit Card, marks a major milestone for both entities.
This strategic move aims to redefine and elevate the banking experience for customers.
USDA Loans in California: A Comprehensive Overview.pptxmarketing367770
USDA Loans in California: A Comprehensive Overview
If you're dreaming of owning a home in California's rural or suburban areas, a USDA loan might be the perfect solution. The U.S. Department of Agriculture (USDA) offers these loans to help low-to-moderate-income individuals and families achieve homeownership.
Key Features of USDA Loans:
Zero Down Payment: USDA loans require no down payment, making homeownership more accessible.
Competitive Interest Rates: These loans often come with lower interest rates compared to conventional loans.
Flexible Credit Requirements: USDA loans have more lenient credit score requirements, helping those with less-than-perfect credit.
Guaranteed Loan Program: The USDA guarantees a portion of the loan, reducing risk for lenders and expanding borrowing options.
Eligibility Criteria:
Location: The property must be located in a USDA-designated rural or suburban area. Many areas in California qualify.
Income Limits: Applicants must meet income guidelines, which vary by region and household size.
Primary Residence: The home must be used as the borrower's primary residence.
Application Process:
Find a USDA-Approved Lender: Not all lenders offer USDA loans, so it's essential to choose one approved by the USDA.
Pre-Qualification: Determine your eligibility and the amount you can borrow.
Property Search: Look for properties in eligible rural or suburban areas.
Loan Application: Submit your application, including financial and personal information.
Processing and Approval: The lender and USDA will review your application. If approved, you can proceed to closing.
USDA loans are an excellent option for those looking to buy a home in California's rural and suburban areas. With no down payment and flexible requirements, these loans make homeownership more attainable for many families. Explore your eligibility today and take the first step toward owning your dream home.
Empowering the Unbanked: The Vital Role of NBFCs in Promoting Financial Inclu...Vighnesh Shashtri
In India, financial inclusion remains a critical challenge, with a significant portion of the population still unbanked. Non-Banking Financial Companies (NBFCs) have emerged as key players in bridging this gap by providing financial services to those often overlooked by traditional banking institutions. This article delves into how NBFCs are fostering financial inclusion and empowering the unbanked.
2. Why Use Multiples?
• A careful multiples analysis—comparing a company’s multiples versus those of
comparable companies—can be useful in improving cashflow forecasts and testing
the credibility of DCF-based valuations.
Multiples address three important issues:
1. How plausible are forecasted cash flows?
2. Why is one company’s valuation higher or lower
than its competitors?
3. Is the company strategically positioned to create
more value than its peers?
Multiple analysis is only useful when performed accurately. Poorly
performed multiple analysis can lead to misleading conclusions.
2
3. What Are Multiples?
• Multiples such as the Price-to-Earnings Ratio (P/E) and Enterprise-Value-to-EBITA
are used to compare companies. Multiples normalize market values by profits,
book values, or nonfinancial statistics.
• Let’s examine a standard multiples analysis of Home Depot and Lowes:
Estimated Earnings Forward-looking
Market
per share (EPS) multiples, 2004
Stock price capitalization
Company July 23, 2004 $ Million 2004 2005 EBITDA P/E
Home Depot $33.00 $74,250 $2.18 $2.48 7.1 13.3
Lowe’s $48.39 $39,075 $2.86 $3.36 7.3 14.4
• To find Home Depot’s P/E ratio (13.3x), divide the company’s end of week closing
price of $33 by projected 2005 EPS of $2.48. Since EPS is based on a forward-
looking estimate, this multiple is known as a forward multiple.
But which multiple is best and why are some multiples misleading?
3
4. Key Issues
To address these questions, we will…
1. Investigate what drives multiples and how to build a multiple that focuses
on the operations of the business
• Enterprise value multiples are driven by the drivers of free cash flow: return
on invested capital and growth.
• To analyze an industry, use an enterprise-value multiple of forward-looking
EBIT, adjusting for non-operating items such as operating leases and excess
cash.
2. Demonstrate why using the often-computed Price-to-Earnings ratio can be
misleading
• The P/E ratio is not a clean measure of operating performance. The ratio
commingles operating, non-operating, and financing activities
3. Examine the benefits and drawbacks to alternative multiples
• We examine the Price-to-Sales ratio, Price-Earnings-Growth (PEG) ratio,
and multiples based on non-financial (operational) data
4
5. Back to Basics… What Drives Company Value?
• To better understand what drives a multiple, let’s derive the enterprise value to
EBIT multiple using the key value driver formula.
g
Start with the key value NOPLAT1 −
Value = ROIC
driver formula.
WACC − g
g
Substitute EBIT(1-T) EBIT(1 - T)1 −
Value = ROIC The enterprise value
for NOPLAT WACC − g multiple is driven by:
(1) return on new
invested capital,
Divide both sides by g (2) growth,
(1 − T)1 −
EBIT to develop the Value ROIC (3) the operating cash
= tax rate, and
enterprise value multiple. EBIT WACC − g
(4) the weighted
average cost of
capital
5
6. Back to Basics… What Drives Company Value?
• Let’s use the formula to predict the multiple for a company with the following
financial characteristics.
• Consider a company growing at 5% per year and generating a 15% return on
invested capital. If the company has an operating cash tax rate at 30% and a 9%
cost of capital, what multiple of EBIT should it trade at?
g
(1 − T)1 −
Value ROIC
=
EBIT WACC − g
5%
(1 − .30)1 −
Value 15%
= = 11.7
EBIT 9% − 5%
6
7. How ROIC and Growth Drive Multiples
• To demonstrate how different values of ROIC and growth will generate different
multiples, consider a set of hypothetical multiples for a company whose cash tax
rate equals 30% and cost of capital equals 9%.
Enterprise value to EBITA* Increasing
ROIC
Long-term Return on invested capital
growth rate 6% 9% 15% 20% 25%
4.0% 4.7 7.8 10.3 11.2 11.8
Note how
4.5% 3.9 7.8 10.9 12.1 12.8 different
Increasing
Growth 5.0% 2.9 7.8 11.7 13.1 14.0 combinations of
Rate growth and ROIC
5.5% 1.7 7.8 12.7 14.5 15.6
can lead to the
6.0% n/a 7.8 14.0 16.3 17.7 same multiple!
When ROIC > WACC, higher growth
leads to higher EV/EBITA Ratio
7
8. Building Effective Multiples
• A well-designed, accurate multiples analysis can provide valuable insights about a
company and its competitors. Conversely, a poor analysis can result in confusion. To
apply multiples properly, use the following four best practices:
Choose Use multiples
Use enterprise Eliminate non-
comparables with based on forward
value multiples operating items
similar prospects looking data
Step 1 Step 2 Step 3 Step 4
To analyze a Use an enterprise When building a Enterprise-value
company using value multiple to multiple, the multiples must be
comparables, you eliminate effects from denominator should adjusted for non
must first create an changes in capital use a forecast of operating items
appropriate peer structure and one profits, rather than hidden within
group. time gains and historical profits enterprise value and
losses reported EBITA
8
9. Step 1: Choosing Comparables
To create and analyze an appropriate peer group:
1. Start by examining other companies in the target’s industry. But how do you define
an industry?
• Potential resources include the annual report, the company’s Standard Industry
Classification Code (SIC) or Global Industry Classification (GIC)
2. Once a preliminary screen is conducted, the real digging begins. You must answer a
series of strategic questions.
• Why are the multiples different across the peer group?
• Do certain companies in the group have superior products, better access to
customers, recurring revenues, or economies of scale?
3. If necessary, compute the median and harmonic mean for sample
• Multiples are best used to examine valuation differences across companies. If you
must compute a representative multiple, use median or harmonic mean.
• Harmonic mean: Compute the EBITA/Value ratio for each company and average
across companies. Take the reciprocal of the average.
9
10. Step 2: Use Enterprise-Value-to-EBITA Multiple
• A cross-company multiples analysis should highlight differences in performance, such
as differences in ROIC and growth, not differences in capital structure.
• Although no multiple is completely independent of capital structure, an enterprise
value multiple is less susceptible to distortions caused by the company’s debt-to-
equity choice. The multiple is calculated as follows:
Enterprise Value MV Debt + MV Equity
=
EBITA EBITA
• Consider a company that swaps debt for equity (i.e. raises debt to repurchase equity).
• EBITA is computed pre-interest, so it remains unchanged as debt is
swapped for equity.
• Swapping debt for equity will keep the numerator unchanged as well. Note
however, that EV may change due to the second order effects of signaling,
increased tax shields, or higher distress costs.
10
11. Step 2: Use Enterprise Value Multiples
Why is the P/E Ratio misleading?
• Conversely, the P/E Ratio can be artificially impacted by a change in capital
structure, even when there is no change in enterprise value.
• It can be shown, that in a world without taxes, the price to earnings ratio is a
function of the unlevered price to earnings ratio, the cost of debt, and the debt to
value ratio:
The price to earnings ratio
of an all-equity company
P K - PE u 1
=K+ where K =
E D kd
k d ( PE u ) − 1
V
Market-based debt The cost of debt
to value ratio
11
12. Price-to-Earnings Ratio: Why can it be Misleading?
An Example:
• Before we use the formula to test the impact of capital structure on the P/E ratio,
let’s try an example.
• Consider an all-equity company whose P/E ratio is 15x.
• The company’s management is considering a move to 20% debt to value,
through borrowings at 5%. Assuming no taxes, what would happen to the P/E
ratio?
P K - PE u 1
=K+ where K =
E D kd
k d ( PE u ) − 1
V
P 20 - 15 The P/E ratio
= 20 + = 14.1
E ( .20)( .05)(15) − 1 would fall!
12
13. Price-to-Earnings Ratio: Why can it be Misleading?
• To show that the P/E ratio can be artificially impacted by a change in the company’s
capital structure, we use the formula to compute multiples for companies with
varying leverage ratios.
Price to earnings
multiple* Price to earnings for an all-equity company
10x 15x 20x 25x 40x
10% 9.5 14.6 20.0 25.7 45.0
20% 8.9 14.1 20.0 26.7 53.3
Increasing
Debt to 30% 8.2 13.5 20.0 28.0 70.0
Value
40% 7.5 12.9 20.0 30.0 120.0
50% 6.7 12.0 20.0 33.3 n/m
P/E Ratio decreases P/E Ratio increases as
as leverage increases leverage increases
* Assumes a cost of debt equal to 5% and no taxes: Therefore, 1/k d equals 20x.
13
14. Price-to-Earnings Ratio: Why can it be Misleading?
Issue 2:
• The second problem with the P/E ratio is that it commingles operating and non-
operating performance. Each source can have vastly different financial
characteristics.
• Excess cash has a very high P/E
ratio (because of extremely low
earnings). Mixing excess cash with
Non-Operating
Gain income from operations usually
raises the P/E ratio.
• One time non-operating gains
and losses such as restructuring
costs and other writeoffs will also
EBIT temporarily raise or lower earnings,
raising the P/E ratio. Most analysts
recognize this problem and make
necessary adjustments.
14
15. Step 3: Use Forward Looking Multiples
• When building a multiple, the denominator should use a forecast of profits, rather than
historical profits.
• Unlike backward-looking multiples, forward-looking multiples are consistent with the
principles of valuation—in particular, that a company’s value equals the present value
of future cash flow, not past profits and sunk costs.
Enterprise Value = Present value of FUTURE cashflows
Enterprise Value therefore…
EBITA
EBITA = should represent FUTURE profit
• Research by Kim and Ritter (1999) and Lio, Nissim, and Thomas (2002) documents
that forward looking multiples increase predictive accuracy and decrease variance
of multiples within an industry.
15
16. Step 4: Adjust for Non-Operating Items
Even the enterprise value-to-EBITA multiple commingles operating and nonoperating
items. Therefore, further adjustments must be made.
1. Excess cash and other non-operating assets have very different financial
characteristics from the core business, exclude their value from enterprise value
when comparing to EBITA.
Enterprise Value Debt + Equity − Excess Cash − NonOperating Assets
=
EBITA EBITA
2. The use of operating leases leads to artificially low enterprise value (missing
debt) and EBITA (lease interest is subtracted pre-EBITA). Although operating
leases affect both the numerator and denominator in the same direction, each
adjustment is of different magnitude.
Enterprise Value Debt + PV(Operating Leases) + Equity
=
EBITA EBITA + Implied Lease Interest
16
17. Step 4: Adjust for Non-Operating Items
3. When companies fail to expense employee stock options, reported EBITA will
be artificially high. Enterprise value should also be adjusted upwards by the
present value of outstanding stock options.
Enterprise Value Debt + Equity + PV(All Outstanding Options)
=
EBITA EBITA − Newly Issued Options
4. To adjust enterprise value for pensions, add the present value of unfunded
pension liabilities to debt plus equity. To remove gains and losses related to plan
assets, start with EBITA, add the pension interest expense, and deduct the
recognized returns on plan assets.
Enterprise Value Debt + Equity + Unfunded Pension Liabilities
=
EBITA EBITA - Recognized Net Pension Gains
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18. Building a Clean Multiple: An Example
$ Million Home Depot Lowe’s
Outstanding debt 1,365 3,755
• Let’s adjust the enterprise Market value of equity 74,250 39,075
multiples of Home Depot Enterprise value 75,615 42,830
and Lowe’s for excess cash
Capitalized operating leases 6,554 2,762
and operating leases.
Excess cash (1,609) (1,033)
• Before adjustments, Home Adjusted enterprise value 80,560 44,559
Depot’s forward looking
2005 EBITA 8,691 4,589
enterprise-value multiple is
Implied interest from leases 340 154
within 7 percent of that for
Adjusted 2005 EBITA 9,031 4,743
Lowe’s. After adjustments,
the difference drops to 5
Home Depot Lowe’s
percent.
Raw enterprise value multiple 8.7 9.3
Adjusted enterprise value multiple 8.9 9.4
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19. An Examination of Alternative Multiples
Although we have so far focused on enterprise-value multiples based on EBITA , other
multiples can prove helpful in certain situations.
• Price-to-Sales Multiple. An enterprise-value-to-sales multiple imposes an
additional important restriction beyond the EV/EBITA multiple: similar operating
margins on the company’s existing business. For most industries, this restriction is
overly burdensome.
• Price Earnings Growth (PEG) Ratio. Whereas a price-to-sales ratio further
restricts the enterprise-to-EBITA multiple, the PEG ratio is more flexible than the
enterprise multiple, because it allows expected growth to vary across companies.
• EV/EBITDA vs. EV/EBIT multiples. EBITDA is popular because the statistic is
closer to cashflow than EBIT, but fails to measure reinvestment, or capture
differences in equipment outsourcing.
• Multiples of operational data. When financial data is sparse, compute non-
financial multiples, which compare enterprise value to one or more operating
statistics, such as Web site hits, unique visitors, or number of subscribers.
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20. Alternate Multiples: Price-to-Sales Multiple
• An enterprise-value-to-sales multiple imposes an additional important restriction:
similar operating margins on the company’s existing business. For most industries,
this restriction is overly burdensome. To see this, consider the following analysis:
Circuit Linens Best Home Bed Bath
City ‘n things Buy Depot Lowe’s & Beyond
Enterprise/Sales
Enterprise/EBITA
Price/Earnings
0 15 30 45 60
Home Depot estimated share price*
• Applying the enterprise value to sales multiple from various retailers to Home Depot
revenue would estimate its “fair” stock price somewhere between $4 and $60, too
wide to be helpful.
20
21. Alternate Multiples: PEG Ratios
• Whereas a price-to-sales ratio further restricts the enterprise-to-EBITA multiple, the
Price-Earnings-Growth (PEG) ratio is more flexible, because it allows expected profit
growth to vary across companies. We measure the PEG ratio as the enterprise value
multiple divided by expected EBITA growth.
Expected To calculate Home Depot’s
Enterprise profit Enterprise
multiple growth PEG ratio adjusted PEG ratio, divide forward
Hardline retailing
looking enterprise multiple (7.1x)
Home improvement
by its EBITA growth rate (11.8%).
Home Depot 7.1 11.8 0.60
Lowe’s 7.3 17.2 0.42
Home furnishing
Bed Bath & Beyond 9.9 16.1 0.61 Based on the enterprise-based
Linens ’n Things 5.1 15.4 0.33 PEG ratio, Bed Bath & Beyond
trades at a significant premium to
Linens ‘n Things.
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22. Alternate Multiples: PEG Ratios
There are two major drawbacks to using a PEG ratio:
1. There is no standard time frame for measuring the growth in profits. The valuation
analyst must decide to use one year, two year or long term growth.
2. The PEG ratio incorrectly assumes Comparing Multiples to Growth Rates
a linear relationship between 25
multiples and growth
Enterprise value to EBITA
20
• Consider company valuations
presented in the graph (the 15
dotted line). As growth
declines, the enterprise value 10
multiple also drops, but by a
declining rate. 5
• A low growth company, such 0
as Company 1, would be 0 2 4 6 8
Long-term growth rate
undervalued using the PEG
Percent
ratio.
22
23. Alternative Multiples: EV to EBITDA
• Many financial analysts use multiples of EBITDA, rather than EBITA, because
depreciation is a noncash expense, reflecting sunk costs, not future investment.
• But EBITDA multiples have their own drawbacks. To see this, consider two
companies, who differ only in outsourcing policies. Because they produce identical
products at the same costs, their valuations are identical ($150).
• What is each companies EV to EBITDA multiple and why are they different?
Comp A Comp B
Revenues 100 100 Company B outsources
Company A
Raw materials (10) (35) manufacturing to
manufactures
another company
product with their Operating costs (40) (40)
own equipment EBITDA 50 25 Incurs depreciation cost
indirectly through an
Incurs depreciation
increase in the cost of
cost directly Depreciation (30) (5) raw material)
EBITA 20 20
23
24. Alternative Multiples: EV to EBITDA
• Because both companies produce identical products at the same costs, their
valuations are identical ($150). Yet, there EV/EBITDA ratios differ. Company A
trades at 3x EBITDA (150/50), while Company B trades at 6x EBITDA (150/25).
Comp A Comp B
Multiples
Enterprise value ($ Million) 150.0 150.0
Enterprise value/EBITDA 3.0 6.0
Enterprise value/EBITA 7.5 7.5
• When computing the enterprise-value-to-EBITDA multiple, we failed to recognize
that Company A (the company that owns its equipment) will have to expend cash to
replace aging equipment.
• Since capital expenditures are recorded as an investing cash flow they do not
appear on the income statement, causing the discrepancy.
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25. Multiples on Non-Financial (Operational) Data
• Multiples based on nonfinancial (i.e. operational) data can be computed for new
companies with unstable financials or negative profitability. But to use an
operational multiple, it must be a reasonable predictor of future value creation, and
thus somehow tied to ROIC and growth.
• Many analysts used operational multiple to value young Internet companies at the
beginning of the Internet boom. Examples of these multiples included:
Enterprise Value Enterprise Value Enterprise Value
Website Hits Number of Subscribers Unique Visitors
• A few cautionary notes:
1. Non-financial multiples should be used only when they provide incremental
explanatory power above financial multiples.
2. Non-financial multiples, like all multiples, are relative valuation tools. They do
not measure absolute valuation levels.
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26. Closing Thoughts
A multiples analysis that is careful and well reasoned will not only provide a useful check
of your DCF forecasts but will also provides critical insights into what drives value in a
given industry. A few closing thoughts about multiples:
1. Similar to DCF, enterprise value multiples are driven by the key value drivers,
return on invested capital and growth. A company with good prospects for
profitability and growth should trade at a higher multiple than its peers.
2. A well designed multiples analysis will focus on operations, will use forecasted
profits (versus historical profits), and will concentrate on a peer group with similar
prospects.
• P/E ratios are problematic, as they commingle operating, non-operating, and
financing activities which lead to misused and misapplied multiples.
3. In limited situations, alternative multiples can provide useful insight. Common
alternatives include the price-to-sales ratio, the adjusted price earnings growth
(PEG) ratio, and multiples based on non-financial (operational) data.
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