Valuation multiples, large/listed caps

Damien Perpetua Fernando Prieto

What is the multiples valuation method?

Method using ratios comparisons between the

target and a group of similar firms, called the peer group, to estimate the value of the aimed firm.

Process based on three principles : -

global valuation of the firm Value = multiple of the profitability capabilities Balanced market rates.

Depends on anticipated growth, risk, interest

Source :

http://wise.fau.edu/~ppeter/fin4422/multiples.pdf

How to define a Peer group?

A peer group is a bunch of companies which are similar to the

target. Multiples are the average ratios of the peer group.

There are several variables used to identify the similar firms :
Business line Revenue Asset size Location

Growth in revenue
Cash Flow

What a peer group looks like?

Can we have different peer groups?

Ratios generally used to value a target

Price Earning Ratio (PER): Market price per share/ Earning per share
PER based on the latest data is called trailing PER; PER based on

forecast is called leading PER.

It represents the time, in year, an investor might have to wait to be

paid back thanks to the earnings. (This is very theoretical)

The higher the PER, the lower the perceived risk This ratio is linked to the plowback ratio, expected growth rate,

required rate of return.

Only use if the peer group shows the same growth of earning per

share and risk on asset and financial structure

Compared valorisation

Is P/E Ratio a consistent proxy to value large caps? (ex: CAC40)

What is the most expensive market?

How much is the P/E Ratio volatile?

Is there any correlation between P/E Ratio and interest rate?

Not that obvious

NOPAT Multiple : The Economic PER

NOPAT Multiple= Firm value/NOPAT

With : Firm value = equity value + net deb

Very used because there is no distortions due to differences

in the financial structure.

Contrary to the PER multiple, NOPAT multiple is designed to

asses the economic asset value.

Price to Book Ratio (PBR) : Market price per share/ Book value per share
It is meaningful only if the book value represents the market

price of the assets.

This ratio is linked to the ROE, expected growth rate,

required rate of return and the plowback ratio.

PBR>1 If ROE> cost of shareholders equity

Price to Sales Ratio (PSR)

Market price per share/ Revenue per share
Used to value non-profitable firm. When it is used to value

profitable businesses it leads to over-valuation.

Linked with the net profit margin, , expected growth rate,

required rate of return and the plowback ratio.

Generally meaningless for large business valuation.

Q&A