A Thought About Valuation and Multiples

A multiple is just someone else’s discounted cash flow – with all the messy maths and assumptions hidden behind a single number.

Market multiples (be it a price earnings, revenue or EBIT multiple) are just single number that hides the assumptions the market is making about that company’s expected future cash flow (and the level of risk associated with that cash flow).

Transaction multiples just hide the acquirers assumptions around the expected cash the asset will produce under their ownership / capital structure / management etc.

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2 Responses to A Thought About Valuation and Multiples

  1. Sam says:

    Interesting point Bert. It is worth noting the multiple may reflect alternative approaches to valuation including technical analysis, dividend discounting or ironically a multiple based method methods. My key take-away from your thought here is that whatever the methodology is it reflects the characteristics of the underlying company and care should be taken when applying the multiple to another company.

    Whatever approach is used the true value is understanding the assumptions used to arrive at the conclusion.

    Sam

  2. Playboy says:

    Somehow i missed the point. Probably lost in translation 🙂 Anyway … nice blog to visit.

    cheers, Playboy.

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