Julian Shocron: How to Value a Company Using Multiples
In this note, Julian Shocron explains the most common shortcut for estimating what a business is worth: looking at what similar businesses sold for. It is called valuation by multiples, or relative valuation.
What does "valuing by multiples" actually mean?
Think about how people price a home. If similar two-bedroom homes on the same street keep selling for about the same price relative to their size, that figure becomes a reasonable starting point for the next one that comes up. Companies work in a similar way. You pick a metric, such as earnings or sales, see how many times that metric has been paid for comparable companies, and apply the same ratio to the business you are looking at.
The method does not try to predict the future. It simply asks: given what the market pays for businesses like this one, roughly where would this one land?
Which multiples are used most often?
| Multiple | What it compares | When it tends to be used |
|---|---|---|
| EV / EBITDA | Enterprise value against EBITDA | Businesses with steady, established operations |
| Price / Earnings (P/E) | Share price against earnings per share | Companies that are already profitable |
| EV / Sales | Enterprise value against revenue | Companies that are not yet profitable, such as many early-stage startups |
Each multiple answers a slightly different question, so the choice depends on what kind of business you are valuing and which figures are meaningful for it.
What is the difference between enterprise value and equity value?
This distinction trips up a lot of people, so it is worth settling before the example.
- Enterprise value (EV): what the whole business is worth, regardless of how it is financed. It belongs to everyone with a claim on the company, lenders included.
- Equity value: what is left for the owners. It equals enterprise value minus debt, plus cash.
An EV/EBITDA multiple gives you enterprise value. To reach equity value, you subtract the debt and add back the cash. P/E works the other way round: because it starts from the share price, it points straight at equity value.
How does it work in practice? (Invented figures, purely to illustrate)
The fictional bakery from the earlier notes has an EBITDA of 170 (operating income of 150 plus 20 of depreciation and amortization). Suppose similar bakeries have recently changed hands at around 6 times EBITDA, and our bakery carries 200 of debt and holds 30 in cash.
| Step | Calculation | Result |
|---|---|---|
| Enterprise value | 170 × 6 | 1,020 |
| Minus debt | 1,020 − 200 | 820 |
| Plus cash | 820 + 30 | 850 |
Under these assumptions, the owners' stake would be worth roughly 850. Change any single input and the answer moves: at 5 times EBITDA, enterprise value would be 850 and equity value 680.
As a side check, an EV of 1,020 on sales of 1,000 works out to an EV/Sales multiple of about 1.0. Comparing more than one multiple is a quick way to spot whether a figure looks out of line.
What are the limits of the method?
- It is only as good as the comparables. If the companies you compare against are not genuinely similar in size, growth and risk, the result means very little.
- It inherits the market's mood. When a whole sector is expensive or cheap, the multiple carries that along with it.
- It is a snapshot. It does not look at how much the business could grow or how much cash it will generate over time. That is the job of a different method, the discounted cash flow (DCF), which works from the cash a business is expected to produce.
In short
Valuation by multiples means pricing a business against similar ones: take a metric, multiply it by what the market pays for that metric, then adjust for debt and cash to reach the owners' share. It is fast and useful as a reference point, but it works best when cross-checked against other methods.
Educational note by Julian Shocron. Not investment advice.
More notes by Julian Shocron: julianshocron.com/en