What are Valuation Multiples?
This article examines the different kinds of valuation multiples that can be used in company valuations in Singapore. The market approach is a widely accepted valuation approach to company valuations in Singapore. It is more recommended for publicly listed companies and organisations that are of the medium sized enterprise scale. Two commonly applied methods of carrying out analysis using valuation multiples under the Market approach would be:
- Guideline public companies / Comparable study of companies (“Comps”)
- Guideline company transactions / Precedent study of transactions (“Precedents”)
Two major forms of valuation multiples exist:
- Multiples of Equity
- Multiples of Enterprise Value
Under the Guideline public companies method, the analyst values a company based on trading multiples taken from publicly traded companies that are similar to the subject company.
Under the Guideline company transactions method, the analyst values a company based upon recent transactions involving the purchase or sale of comparable companies that have occurred in the private or public marketplace.
The analyst/valuer needs to exercise professional judgement when using either of these two methods because of the simple fact that no two companies are the same, even if they are of similar business nature and operate within the same industry. Just to list several key differences such as management team, operating efficiency, capital and debt structure are usually main differing variables already. Therefore the analyst/valuer may need to adjust for differences in these variables and risk of the guideline companies compared to the subject company undergoing valuation.
Advantages and Disadvantages of Valuation Multiples
For investors and corporations, using valuation multiples as part of valuation analysis helps them make informed choices . This is particularly true as these multiples can be used to provide information on the financial position of an organisation. In addition, multiples are important because they consider crucial investment judgement decisions. Lastly, for most analysts, the adaptability of multiples makes them convenient to use.
However, because of the way multiples simplify complex knowledge into only a single value, this simplicity can often be considered a disadvantage. This simplification may lead to misinterpretation and makes it almost impossible to break down the impact of different variables on the multiple.
Multiples reflect a single instance of the state of a business, rather than giving any description of what happens over a given time frame. As a result, they cannot easily show how a business develops or advances. In addition, multiples represent short-term rather than long-term data. The resulting values therefore may only be appropriate for use in the short‑term and not in the longer future.
In terms of sourcing for data for use, although there are databases that provide information on private and public transactions of businesses, they are limited in terms of the information and publicly-available data on the transaction terms and financial performance of the guideline companies that were transacted. This is even more limited for privately held companies.
As Singapore’s market is relatively smaller compared to the US or UK, another major disadvantage is obviously the limited data available. In this case, analyst/valuers should not depend heavily on the market approach as their primary approach if there is insufficient data to support valuation findings.
Generally speaking, our valuers tend to use the market approach as a secondary approach as a cross-check function for valuations of SMEs in Singapore.
Equity multiples
Investment decisions use multiples of equity, particularly when investor(s) want noncontrolling (i.e. minority) positions in companies. The following list details some common equity multiples used as part of company valuations:
- P/E Ratio: the most widely used equity multiple; data is easily accessible and measured as a proportion of share price to earnings per share.
- Price/Book Ratio: this multiple is helpful if assets primarily drive profits; it is measured as the share price to book value per share proportion.
- Dividend Yield: this multiple can be used for to compare cash returns versus investment types and is measured as the proportion of dividend per share to share price.
- Price/Sales: this type of multiple is employed for businesses that are trading at a loss and can be used for quick estimates of company value. This is measured as the proportion of share price to sales (revenue) per share
It is important to note that financial analyst(s) must keep in mind that businesses can have differing amounts of debt and this may influence equity multiples.
Enterprise Value (EV) multiples
Multiples of enterprise value are appropriate multiples to consider when making decisions on mergers and/or acquisitions. The following list highlights some common multiples of enterprise value used in company valuations:
- EV/Revenue: slightly influenced by accounting differences; measured as the enterprise value to sales or revenue proportion.
- EV/EBITDAR: frequently used in in the hotel and transport industry; measured as enterprise value to EBITAR and Rental Costs proportions.
- EV/EBITDA: most commonly used multiple of enterprise value, EBITDA can be used in place of free cash flows; measured as the proportion of enterprise value to enterprise value or EBITDA.
- EV/Invested Capital: this multiple is used for capital-intensive industries; measured as the enterprise value to invested capital proportion.
Obviously, other multiples of equity and enterprise value exist. Here, we are only including the most commonly used ones. A more thorough understanding of these and other multiples can help analysts when making financial analyses.
Methods of using multiples
It is possible to analyse all of the above metrics using two common approaches to company valuation multiples:
- Public company comparable Analysis – this approach analyses public businesses that are similar to the one being valued. For each business, an analyst will compile share values, market capitalization, capital structure, sales, EBITDA and profits.
- Previous merger and acquisition (M&A) Transactions – This approach analyses previous past mergers and acquisitions (M&A) for businesses in the same market that can be used as a point of comparison for the business being valued.
Contact us if you would like to know more about the valuation multiples that apply to your company valuation.
