The Dark Side of Valuation: Valuing Young, Distressed, and Complex Businesses, Second Edition

Conclusion

In relative valuation, we estimate the value of an asset by looking at how similar assets are priced. To make this comparison, we begin by converting prices into multiples—standardizing prices. Then we compare these multiples across firms that we define as comparable. Prices can be standardized based on earnings, book value, revenue, or sector-specific variables.

The allure of multiples remains their simplicity. There are four steps in using them soundly. First, we have to define the multiple consistently and measure it uniformly across the firms being compared. Second, we need a sense of how the multiple varies across firms in the market. In other words, we need to know what a high value, low value, and typical value are for the ...