Which multiples should be used for valuation?

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In practice, the EV/EBITDA multiple is the most commonly used, followed by EV/EBIT, especially in the context of M&A. The P/E ratio is typically used by retail investors, while P/B ratios are used far less often and normally only seen when valuing financial institutions (i.e. banks).

What does multiples mean in valuation?

A multiple is simply a ratio that is calculated by dividing the market or estimated value of an asset by a specific item on the financial statements. The multiples approach is a comparables analysis method that seeks to value similar companies using the same financial metrics.

How is DCF different from multiple valuation?

The irony in comparing and contrasting multiples and DCF is that multiples are merely a simplified version of DCF. All of the fundamental drivers of business value are incorporated in both techniques, but those drivers are implied when using multiples whereas they are explicitly estimated with DCF.

What is the most common valuation multiple?

P/E multiple
The most common multiple used in the valuation of stocks is the P/E multiple. It is used to compare a company’s market value (price) with its earnings. A company with a price or market value that is high compared to its level of earnings has a high P/E multiple.

How are valuation multiples determined?

Valuation multiples are financial measurement tools that evaluate one financial metric as a ratio of another, in order to make different companies more comparable. Multiples are the proportion of one financial metric (i.e. Share Price) to another financial metric (i.e. Earnings per Share).

How much is a multiple?

: being or consisting of more than one We need multiple copies. : the number found by multiplying one number by another 35 is a multiple of 7.

Is DCF and FCF the same?

The most common variations of the DCF model are the dividend discount model (DDM) and the free cash flow (FCF) model, which, in turn, has two forms: free cash flow to equity (FCFE) and free cash flow to firm (FCFF) models.

What does LTM and NTM mean?

Financial analysts use Last Twelve Months (LTM) or Next Twelve Months (NTM) and a number of different valuation multiples when evaluating corporate deals.