Valuation multiples are financial ratios that relate a company’s market value to a key financial performance metric, such as earnings, revenue, or book value. They provide insight into how much investors are willing to pay for each unit of a company’s performance or assets.
At their core, multiples are shorthand for valuing a company by comparing it to peers or industry standards. They’re widely used because they are intuitive and provide a quick snapshot of relative value.
There are two main categories of valuation multiples: equity multiples and enterprise multiples. For private companies, enterprise multiples are most relevant. These are the two most common:
Enterprise multiples consider the entire value of the business, including debt. These are especially useful for comparing companies with different capital structures. Examples include:
Enterprise Value-to-EBITDA (EV/EBITDA): Compares enterprise value (market capitalization plus debt, minus cash) to earnings before interest, taxes, depreciation, and amortization (EBITDA). It’s a popular metric for assessing operational performance.
Enterprise Value-to-Sales (EV/Sales): Compares enterprise value to total revenue. This is often used for high-growth or early-stage companies that may not yet be profitable.
The valuation multiples has some imitations, but can be used for example for peer comparison.