Valuation Using Multiples

This chapter provides an in-depth discussion on using enterprise and equity multiples to value a target firm and its equity. It begins with a discussion and illustration of the use of price-to-earnings (P/E), the price-to-book value (P/B), price-to-sales (P/Sales and the price-to-free cash flow to equity (P/FCFE) ratios to value equity. This is followed by a discussion and illustration of equity valuation using the following multiples from fundamentals: • The P/E hybrid model from the P/E multiple and the dividend discount model. • The single-stage P/E target multiple model based on the firm’s return on equity (ROE). • The two-stage-growth P/E target multiple model based on the firm’s ROE. • The Price-earnings growth (PEG) model. • The single-stage P/B target multiple model based on the firm’s ROE and its variant. The chapter then proceeds to discuss enterprise valuation using enterprise-to-sales (EV/Sales), enterprise value-to-free cash flow to the firm (EV/FCFF), enterprise value-to-earnings before interest and tax (EV/EBIT), enterprise value-earnings before interest, tax, amortisation and depreciation (EV/EBITDA), enterprise value-to-net operating profit less adjusted taxes (EV/NOPLAT), enterprise value-to-invested capital (EV/Invested Capital) and enterprise value-to-capacity units (EV/Capacity Unit) multiples. The chapter concludes with an illustration of using the Warranted Equity Method to value bank equity.