
Enterprise valuation multiples are a crucial tool for investors and analysts to determine the value of a company. They compare the value of a company to its earnings or revenue.
A company's enterprise value (EV) is calculated by adding its market capitalization to its debt and subtracting its cash. This gives you a comprehensive picture of a company's financial situation.
There are several types of valuation multiples, including the EV-to-EBITDA multiple, which is calculated by dividing a company's enterprise value by its earnings before interest, taxes, depreciation, and amortization.
This multiple is useful for comparing companies with different capital structures, such as those with a lot of debt or those with a lot of cash.
On a similar theme: How to Calculate Enterprise Value for a Private Company
Calculating Enterprise Valuation
Enterprise value, also known as TEV, is calculated by adding net debt to equity value. This is a simplistic assumption that larger companies hold more debt on their balance sheets.
To calculate enterprise value, you need to know the equity value and net debt of the company. Equity value is typically obtained from sources like Bloomberg or First Call, and net debt is found on the company's balance sheet.
Broaden your view: Simple Valuation of a Company

A simple example of enterprise value calculation is shown in Example 3, where Company A has an enterprise value of $5.1 billion, Company B has an enterprise value of $7.1 billion, and Company C has an enterprise value of $8.6 billion.
Here's a summary of the enterprise value calculation:
Unlevered Free Cash Flow
Unlevered free cash flow (UFCF) is the free cash flow attributable to all suppliers of capital, including both shareholders and debt holders.
To calculate UFCF, start with operating income, which is an unlevered figure because it's calculated before interest expense. This means we're looking at the company's cash operating profit without factoring in interest payments.
EBITDA is used as a measure of true cash operating profit, which is calculated by adding back depreciation and amortization to operating profit. We'll use this figure as the starting point for our UFCF calculation.
We then subtract taxes from EBIT to get EBIAT, which takes into account the tax rate. This step is crucial in accurately calculating UFCF.
Next, we add back depreciation expense to EBIAT, which is a non-cash item that's not a part of the company's actual cash flow.
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How to Calculate

Calculating enterprise valuation involves understanding the concept of relative valuation and using comparable companies (comps) to determine a company's worth. This approach reflects reality by using actual trading prices.
To calculate valuation multiples, you need to standardize the valuation of companies. This is because absolute values, such as equity value or enterprise value, cannot be compared on their own. For example, comparing the prices of houses is meaningless due to size differences between houses and other factors.
The median or mean of the industry peer group serves as a useful point of reference to determine the worth of the target company. You can calculate the market capitalization (market cap) by multiplying the share price by the total diluted share count.
Here are the steps to calculate market cap:
Once you have the market cap, you can calculate the equity value by multiplying the share price by the diluted shares outstanding. For example, Company A's equity value is $5bn.
To calculate valuation multiples, you need to use formulas such as EV/Revenue, EV/EBIT, EV/EBITDA, P/E Ratio, and PEG Ratio. These formulas are used to standardize a company's value on a per-unit basis, making it easier to compare with comparable peers.
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Types of Enterprise Valuation

Enterprise valuation is a crucial aspect of understanding a company's value. It's calculated independently of the capital structure, making it a reliable metric for investors and lenders.
To determine enterprise value, you can use various metrics in the denominator, such as EBIT, EBITDA, revenue, and unlevered free cash flow (FCFF). These metrics are all unlevered, meaning they're pre-debt.
Enterprise value is calculated by adding debt to equity value, which is why these unlevered metrics are a perfect match. They provide a comprehensive picture of a company's financial health.
Here are some common metrics used in enterprise valuation multiples:
These metrics are essential in creating practical valuation multiples that help investors and lenders make informed decisions. By understanding these metrics, you can make more accurate assessments of a company's value.
Choosing a Valuation Method
The Enterprise Value to Earnings Before Interest and Taxes (EV/EBIT) multiple is often used to value companies with significant debt, as it takes into account a company's leverage.

The Price to Earnings (P/E) multiple is commonly used for companies with stable earnings and a low debt-to-equity ratio, such as those in the technology sector.
The EV/EBITDA multiple is a variation of the EV/EBIT multiple, which excludes depreciation and amortization to account for companies with significant non-cash expenses.
The P/E multiple is not suitable for companies with declining earnings or those in industries with high debt levels, such as the energy sector.
The EV/Sales multiple is often used for companies with high growth rates and a strong brand, such as those in the consumer goods sector.
The EV/EBIT multiple is more sensitive to changes in interest rates than the EV/EBITDA multiple, which can make it a better choice for companies with significant debt.
Intriguing read: Interest Rates and Bond Valuation
Using Valuation Multiples
Using valuation multiples is a key part of enterprise valuation, allowing you to compare a company's value to its cash profits. This method is useful because it takes into account a company's debt and cash levels, in addition to its stock price.

A valuation multiple is an expression of market value relative to a key statistic, such as earnings or cash flow. There are several types of multiples, including the enterprise multiple, which compares the total value of a company to its cash profits.
The enterprise multiple can vary depending on the industry, so it's essential to compare it to other companies within the industry or to the average industry in general. You can calculate the multiple as EV/EBITDA, EV/EBIT, or EV/NOPAT, which reveals the rating of a business independently of its capital structure.
Here are some common valuation multiples, along with their formulas:
Remember, not all multiples are created equal, and some may be more relevant than others depending on the company and industry. For example, the price-to-book ratio is useful for comparing market value to accounting book value, but it may not be as relevant for companies with non-recurring expenses or income.
Curious to learn more? Check out: Enterprise Value vs Book Value
Formula

The valuation multiple formula is straightforward. It consists of two components: the numerator, which is a measure of value such as equity value or enterprise value, and the denominator, which is a financial or operating metric like EBITDA, EBIT, or revenue.
The numerator and denominator must match in terms of the represented investor group. This means that if you're using enterprise value in the numerator, you should use an enterprise value-based metric in the denominator.
Here are some common valuation multiples:
- Enterprise Value Multiples: EV/EBITDA, EV/EBIT, EV/Revenue
- Equity Value Multiples: EV/Earnings Per Share (EPS), Price-to-Earnings (P/E) ratio
In practice, the EV/EBITDA multiple is the most commonly used, followed by EV/EBIT. This is especially true in the context of mergers and acquisitions. The P/E ratio, on the other hand, is typically used by retail investors, while the P/B ratio is used far less often and usually only when valuing financial institutions like banks.
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Equity Price Based
Equity price based multiples are most relevant when investors acquire minority positions in companies. Care should be used when comparing companies with very different capital structures.
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Different debt levels will affect equity multiples because of the gearing effect of debt. In addition, equity multiples will not explicitly take into account balance sheet risk.
The P/E ratio is a commonly used equity price based multiple, calculated as share price divided by earnings per share (EPS). EPS is net income divided by the weighted average number of shares in issue.
The P/E ratio has several advantages, including being a widely recognized and used metric. However, it also has some disadvantages, such as not taking into account balance sheet risk.
Other equity price based multiples include the Price / cash earnings, Price / book ratio, PEG ratio, Dividend yield, and Price / Sales. These multiples can be used in conjunction with the P/E ratio to get a more complete picture of a company's valuation.
Here are some examples of equity price based multiples:
Discounted Forward PE Ratio Method
The Discounted Forward PE Ratio Method is a way to estimate a company's future value. This method takes into account the company's expected earnings growth.

To calculate the average corrected P/E ratio, you need to add up several years of P/E ratios and divide by the number of years. For example, VirusControl used (17.95 + 21.7 + 20.8) / 3 to get their average corrected P/E ratio.
The net profit at the end of the forecast period is a crucial factor in this calculation. VirusControl expects a net profit of about €2.2 million at the end of the fifth year.
You multiply the average corrected P/E ratio by the net profit to get the estimated future value. For VirusControl, this calculation resulted in an estimated future value of €44.3 million.
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Multiples
Multiples are a fundamental concept in valuation, and understanding them can help you make informed investment decisions. A multiple is simply an expression of market value of an asset relative to a key statistic.
The most commonly used multiples are based on earnings, cash flow, or other financial metrics, such as EBITDA, EBIT, or NOPAT. These multiples reveal the rating of a business independently of its capital structure.
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Enterprise value (EV) multiples, on the other hand, take into account a company's debt and cash levels, making them more comprehensive than traditional multiples. EV multiples can vary depending on the industry, so it's essential to compare them to other companies within the same industry.
Some common EV multiples include EV/EBITDA, EV/EBIT, and EV/NOPLAT. These multiples are particularly useful in mergers and acquisitions, where the entire company's stock and liabilities are acquired.
To determine the correct multiple, you need to identify a peer group of companies that are similar to the one you're valuing. This can be done by searching the market for companies with similar characteristics, such as operating margin, company size, products, customer segmentation, growth rate, cash flow, and number of employees.
Here are some common multiples used in valuation:
Remember, multiples can vary depending on the industry and the company's characteristics. It's essential to consider these factors when selecting a multiple and to use caution when using multiples that are not based on earnings or cash flow drivers.
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Process Data Diagram

The process data diagram is a visual representation of the steps involved in company valuation using multiples. It provides a clear overview of the activities involved in this method.
The diagram shows that company valuation using multiples involves several key activities. These activities are explained in more detail in section 3 of the model.
To better understand the process, let's break down the diagram. It starts with an overview of the process, which is explained in the diagram itself.
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Common Valuation Traps
Value traps are stocks with low multiples that create an illusion of a value investment, but the fundamentals of the industry or company point toward negative returns.
Investors often assume a stock's past performance is indicative of future returns, and when the multiple comes down, they jump at the opportunity to buy it at a "cheap" value.
Knowledge of the industry and company fundamentals can help assess the stock's actual value, but it's essential to look beyond the surface level.
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Forward multiples should be lower than current LTM multiples, but if they're higher, it generally means the profits will be declining, and the stock price is not yet reflecting this decline.
Value traps occur when forward multiples look overly cheap, but the reality is the projected EBITDA is too high, and the stock price has already fallen, likely reflecting the market's cautiousness.
Comparing companies with different sizes, revenue, growth rates, and margins can lead to misleading conclusions about valuation multiples.
For example, Dollar General and Dollar Tree are much smaller than Target, but Target is much smaller than Costco and Walmart, resulting in a huge valuation divergence between these groupings.
Valuation multiples mostly reflect a company's short-term expectations and recent history, so they don't capture the 10 or 20-year outlook.
A company's stock price can overreact to a bad quarter, even if the long-term picture remains positive, making it essential to look beyond short-term fluctuations.
It's crucial to compare very similar companies in the same geography with similar revenue, growth rates, and margins to get a more accurate picture of valuation multiples.
Example Calculations and Data

To calculate enterprise valuation multiples, we need to understand the process behind it. The median or mean of the industry peer group serves as a useful point of reference to determine the worth of the target company.
A valuation using comps has the distinct advantage of reflecting “reality” since the value is based on actual, readily observable trading prices. This is because the value is based on actual market values of similar companies.
To illustrate how a simple calculation works, let's look at the example of Target. We'll calculate its LTM EBITDA multiple in 2 steps. First, we calculate its EBITDA based on Operating Income + Depreciation & Amortization on the Cash Flow Statement + add-backs for any non-recurring charges.
Here are the steps to calculate EBITDA: Calculate its EBITDA based on Operating Income + Depreciation & Amortization on the Cash Flow Statement + add-backs for any non-recurring charges.Calculate its Enterprise Value based on its Equity Value – Cash + Debt +/- other items in the Enterprise Value bridge.
For Target, we calculate the Last Twelve Months or LTM figures for the company by taking the annual numbers, adding the most recent 6-month period, and subtracting the same 6-month period from the previous year. This is done to get the most recent data as of the valuation date.
Broaden your view: Value Based Enterprise

The Enterprise Value for Target is calculated by multiplying the company's diluted share count by its share price as of the valuation date, subtracting Cash, and adding Debt. These numbers come from public sources like Google Finance and the company's quarterly filing.
Here are the valuation multiples for Target:
Comparing Target to other U.S.-based retailers with over $10 billion in revenue, we can see that it has lower revenue growth than the public comps and similar EBITDA margins.
Additional reading: Enterprise Value Revenue
Industry-Specific Considerations
In the tech industry, a company's valuation multiple is often heavily influenced by its growth rate, with high-growth companies commanding higher multiples.
For instance, a software company with a 20% growth rate may have a higher valuation multiple than a software company with a 5% growth rate.
In the retail industry, on the other hand, valuation multiples tend to be more closely tied to the company's cash flow and profitability.
The article highlights that a retail company with strong cash flow and high profitability may be valued more highly than a retail company with weak cash flow and low profitability.

In the healthcare industry, valuation multiples are often influenced by regulatory factors, such as changes in reimbursement rates and healthcare policies.
For example, a medical device company may have a higher valuation multiple if it has a strong pipeline of innovative products that are likely to be approved by regulatory bodies.
In general, valuation multiples can vary significantly across different industries, and it's essential to understand these industry-specific considerations when evaluating a company's valuation.
Frequently Asked Questions
What is a good enterprise value multiple?
A good enterprise value multiple (EV/EBITDA) is generally considered to be below 10, indicating an undervalued company. However, the ideal range varies by industry, typically between 8 and 30.
Sources
- https://www.investopedia.com/articles/fundamental-analysis/08/enterprise-multiple.asp
- https://macabacus.com/valuation/multiples
- https://www.wallstreetprep.com/knowledge/valuation-multiples/
- https://breakingintowallstreet.com/kb/valuation/valuation-multiples/
- https://en.wikipedia.org/wiki/Valuation_using_multiples
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