What multiple valuation involves in practice
In practice, multiple valuation means that a key figure, such as profit or revenue, is multiplied by a multiple taken from comparable companies. The result is an estimate of the company's value.
The method is relatively simple to use, but requires a good understanding of which companies are actually comparable. Choosing the wrong comparables can lead to misleading valuations.
Common multiples used in valuation
Multiple valuation is based on a selection of established key ratios that reflect the company's performance.
- EV/EBIT or EV/EBITDA
- P/E ratio based on earnings
- Revenue multiples
- Sector-specific key ratios
- Comparison between growth and profitability
When the right multiple is used in the right context, the method can give a clear, market-based picture of value.
When multiple valuation is particularly useful
Worth bearing in mind
Multiple valuation is often used when there are comparable companies in the market, for example within the same sector or business model. The method is common in acquisitions, investment analysis and the valuation of both listed and unlisted companies.
It is particularly well suited when the market already prices similar companies. Multiples can then serve as a reality check against more theoretical valuation models.
Frequently asked questions
What is the difference between multiple valuation and discounted cash flow?
Multiple valuation compares companies with the market, whereas discounted cash flow is based on future cash flows.
Is multiple valuation reliable?
It is useful as a comparison, but should be complemented by other methods for greater precision.
Can multiple valuation be used for unlisted companies?
Yes, by comparing with listed companies or completed transactions in the same sector.
Which multiple is best to use?
It depends on the company's business model, profitability and sector.
Why do multiples differ between companies?
Differences in growth, risk, profitability and market position affect which multiples are reasonable.