Business Valuation

Other valuation methods

Multiple methods
Marco Vulpiani

"What I have here in my heart is like faith, but not faith.

What I have here in this room is knowledge without proof..
What I have here in my hand is like knowing but deeper
It's why I have faith"
(Marillion, Faith)

Contents
1. Introduction
2. Stock Exchange Market Multiples Method
3. Comparable transactions method

Marco Vulpiani. For information contact: mvulpiani@deloitte.it

Multiple methods
Introduction
The Enterprise Value of a company is determined on the basis of
multiples of certain key economic business measures that are expressed
by the market and refer to listed companies operating in the same sectors
as the company to be valued.

Firm Value = MF * determined economic business measure

Multiplicative Factor

Marco Vulpiani. For information contact: mvulpiani@deloitte.it

Multiple methods
Introduction

Financial Methods

Relative valuation methods

In the Financial Methods the value of

a firm is expressed by estimating its
future
cash
flows,
suitably
discounted.

In the relative valuation(*), the

Enterprise Value is estimated by
looking at the way comparable
companies are valued.

(*) Damodaran A., 2002

Marco Vulpiani. For information contact: mvulpiani@deloitte.it

Contents
1. Introduction
2. Stock Exchange Market Multiples Method
3. Comparable transactions method

Marco Vulpiani. For information contact: mvulpiani@deloitte.it

Multiple methods
Stock Exchange Multiples Method
The purpose of this method is to develop relations (through the use of multiples)
based on the companies with a view to identifying the relationship between the
market price of a firms assets and economical business variables.

The value assigned to the company is equal to the value determined by the
stock market, regardless of the actual value of the companys assets or income

The multiples method takes the expected growth of the result

and the assessment of the risk directly from the market

Marco Vulpiani. For information contact: mvulpiani@deloitte.it

Multiple methods
Stock Exchange Multiples Method
1st critical
issue

Reliability of market opinion and of stock exchange

sensitivity to contingent circumstances

2nd critical
issue

The choice of multipliers presents some problems in

relation to the observations and data collection reference
period

The use of both short and medium reference

periods is advisable in order to verify any
fluctuations attributable to the volatility of the equity
markets and/or individual stocks
Marco Vulpiani. For information contact: mvulpiani@deloitte.it

Multiple methods
Stock Exchange Multiples Method
Method application:

2
Comparables
identification

3
Calculation
and selection
of multiples

Marco Vulpiani. For information contact: mvulpiani@deloitte.it

4
Application of
multiples to
the firm

Eventual
application of
discounts or
premiums

Multiple methods
Stock Exchange Multiples Method
Comparables:
For the application of this method, it is necessary to identify a set of listed
companies comparable with the company in question.
1
Degree of
comparability

3
4

Marco Vulpiani. For information contact: mvulpiani@deloitte.it

Sector

Competitive conditions
Size

Profit margins

Multiple methods
Stock Exchange Multiples Method
Comparables:
For the purposes of application of the multiples method, the following
requirements must be met:
A

Requirements
B

There must be a similarity in the growth rates

of the expected cash flows of the business and
in the degree of risk, between comparable
companies.
The value of the firm, must vary in direct
proportion to the changes in the economical
measure selected as a performance
parameter.

BUT, in practice, comparable companies rarely meet these assumptions.

Marco Vulpiani. For information contact: mvulpiani@deloitte.it

10

Multiple methods
Stock Exchange Multiples Method
Comparables:

1st

2nd

Critical Issue

Selection of the sample comparable companies

is likely to become extremely subjective

Critical Issue

Selection of the sample comparable companies

is likely to become extremely subjective

The results of the valuation obtained using the multiples method

can be in some circumstances less reliable than those obtained
using financial methods.
Marco Vulpiani. For information contact: mvulpiani@deloitte.it

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Multiple methods
Stock Exchange Multiples Method
Multiples:
The two types of multiples most frequently used for company valuation using the
market approach are:

Asset Side

Multiples calculated taking into account the total value of the

company (enterprise value), which estimates the value of the
capital indirectly.

Equity Side

Multiples calculated taking into account the market value of

equity alone (P), allowing a direct estimate of the equity value.

Marco Vulpiani. For information contact: mvulpiani@deloitte.it

12

Multiple methods
Stock Exchange Multiples Method
Multiples:
Fundamental multiples are:
P/E
(Price per share/Earning per Share)

Market price per share

Net Earning per share

EV/EBIT
(Enterprise Value/Earnings before Interest
and Taxes)

Equity value + Debt value

EV/Sales
(Enterprise Value/Sales)

Equity value + Debt value

P/BV
(Pricing/Book Value)

Marco Vulpiani. For information contact: mvulpiani@deloitte.it

EBIT

Sales
Market price per share
Book value per share

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Multiple methods
Stock Exchange Multiples Method
Multiples:
In addition to fundamental multiples, there are also derived multiples, which
follow the same logic as the former, and are used by analysts to limit the
consequences of the lack of uniformity between the selected companies in
terms of depreciation and provision policies:

P/CE
(Price/Cash Earning)

EV/EBITDA
(Enterprise Value/Earning Before Interest,
Taxes, Depreciation and Amortization)

Marco Vulpiani. For information contact: mvulpiani@deloitte.it

Market Price per Share

Net Income + D&A per share

Equity value + Debt value

EBITDA

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Multiple methods
Stock Exchange Multiples Method
Multiples:
Placing areas of the balance sheet expressed at market value side by side with
the same values expressed through multiples gives the following results:

Market value
of equity
(Equity value)

EV/EBIT
EV/EBITDA
EV/SALES

Marco Vulpiani. For information contact: mvulpiani@deloitte.it

Market value
of operative
Capital
(Enterprise
Value)

P/E
P/CE

P/BV

Market value
of Debt
(Debt value)

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Multiple methods
Stock Exchange Multiples Method
Multiples:

Equity
Side

Equity side multiples lend

themselves to an affected
valuation, thus leading to
incorrect conclusions.

Marco Vulpiani. For information contact: mvulpiani@deloitte.it

Asset sides multiples have

the advantage of being
more easily comparable to
companies with different
financial leverage than
equity side ones.

Asset
Side

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Contents
1. Introduction
2. Stock Exchange Market Multiples Method
3. Comparable transactions method

Marco Vulpiani. For information contact: mvulpiani@deloitte.it

17

Multiple methods
Comparable transaction methods
The valuation method of comparable transactions differs from the multiplesbased method in relation to the nature of the prices that express the negotiated
values used to construct the multiples

The prices referred to are those detectable in the context of private negotiations
for controlling stakes in comparable companies.

Marco Vulpiani. For information contact: mvulpiani@deloitte.it

18

Multiple methods
Comparable transaction methods
1st Critical Issue

Collection of transaction prices for stakes

in the economic capital of comparable companies, due to
the relatively modest degree of publicity that is
characteristic of the corporate control market.

2nd Critical Issue

Need to ensure that market conditions have not changed

in the period of time elapsing from the time the prices
were collected and the valuation was performed.

3rd Critical Issue

The low frequency of transactions of the same nature

often makes it necessary to extend the recognition period
of transactions and prices to include the risk of
inconsistent value.

Marco Vulpiani. For information contact: mvulpiani@deloitte.it

19

Multiple methods
References
M. Vulpiani, "Special Cases of Business Valuation", McGraw Hill
(Chapter 1, Par. 1.2)

Marco Vulpiani. For information contact: mvulpiani@deloitte.it

20

Multiple methods

Thank you for Your Attention

Marco Vulpiani. For information contact: mvulpiani@deloitte.it

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