Multiples valuation

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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.

See also