Originally just a valuation solidity check, multiples have become a popular approach to value young, fast growing companies. Equidam integrates this approach to estimate the exit value in the VC method and the terminal value in the DCF with multiple, avoiding the inconsistencies of more simplistic applications.
What is a multiple and how is it used
A multiple is the ratio between the valuation and an accounting result (revenues, EBITDA, EBIT, etc.) of a company. It is usually considered by industry. Practitioners use the product of an industry multiple and a company’s reported accounting result as a proxy of that company’s valuation.
The simplicity of this approach leads many practitioners to apply it acritically to compute valuations. In fact this might generate biased results failing to represent the fair value of a company.
EBITDA multiple on the last projected year
Revenues vs EBITDA multiple
Apart from some industry-specific exceptions (e.g. banking, real estate), the most reliable multiples are based on EBITDA. As it also takes into account the main expenses due to core operations, it is the main accounting proxy to cash flow generation. As cash is the ultimate value driver, EBITDA is to be preferred to revenues.
Current year vs last projected year
In order to overcome the limits of being an average it is important to apply the multiple to the last projected year EBITDA and then discount it to the present value. This allows to take into account the company specific growth (EBITDA growth) and risk (discount rate).
Equidam follows these guidelines in order to use the whole informational power of the multiple and avoid biases.
Where you are looking for greater specificity in your multiples, we offer an Advanced Multiples module, allowing users to search a database of over 30,000 public companies and select either a specific multiple, or average a collection of multiples. You can also use this module to use a revenue multiple rather than an EBITDA multiple in your valuation, which may be useful in specific circumstances.
Read more about our Advanced Multiples here.
The source of Equidam’s industry multiple is the online dataset of public companies worldwide curated with annual updates by Prof. Aswath Damodaran of New York University.
The list of EBITDA multiples by industry applied by Equidam is reported here.
The source of Equidam's Advanced Multiples is public stock market data from global exchanges, and is updated on a weekly basis.