A method of business valuation which is based on:
(i) a relevant measure; and
(ii) the ratio of value to that measure for a comparable business (or a comparable group of businesses).
The most widely used financial measure for this purpose for a mature business is accounting earnings.
For other types of businesses, relevant measures might include - for example - turnover, or numbers of subscribers.
In simple terms, a lower multiple would indicate one or more of:
- weaker future growth prospects
- higher risk
- lower asset quality
- poorer management
- possible undervaluation
Higher multiples would suggest better growth propsects, lower risk, better asset quality, better management or possible overvaluation.