Valuation: The Market Approach

Chapter 6

The Value Multiples

The value multiples of the comparable companies should be calculated by means of price quotations as per the relevant valuation date. Furthermore, working with the market approach, one may either:

1. derive the market value of the business operations; that is, the market value of operating/invested capital, i.e. the enterprise value (EV) or

2. derive the market value of all outstanding shares, that is, the market value of equity, i.e. the price (P).

These two options also correspond. The value of invested capital, for example, may either be derived by way of a direct approach, that is, by way of value multiples comprising the entire capital structure (i.e. EV multiples), or indirectly, using value multiples comprising solely the equity capital (i.e. P multiples) with the net debt of the subject company added.

Similarly, the equity value may either be derived directly, by value multiples comprising solely the equity capital (i.e. P multiples), or indirectly, by value multiples comprising all invested capital (i.e. EV multiples) and then subtracting the subject company’s interest-bearing net debt.

Note, however, that the calculated enterprise value as well as the calculated equity value of any given subject company should be the same, irrespective of the method chosen. That is, the equity value calculated via the indirect approach (i.e. the calculated equity value using EV multiples) should have exactly the same outcome as the equity value calculated ...