Last Updated on December 15, 2022 by Anda Malescu
In this article we discuss business valuation multiples by industry. One of the most consistent ways to value a company is to use the market-based approach. This approach includes the comparable transactions method and the market multiple method.
The comparable transactions method calls for identifying companies similar to the company being valued and those companies were also subject to a transaction in a relevant time period. Based on the transacted price for the business, ratios such as price/earnings or price/cash flow can be calculated. After that, those ratios can be used to value the company in question.
The market multiple approach uses the same ratios as the market multiple method, but instead of identifying companies that were subject to a merger or an acquisition, uses comparable companies that are publicly traded. Both methods assume that markets are efficient and provide a reliable basis to value a company. To use each method properly, a valuation professional should understand which business valuation multiples by industry to use.
• The most popular ratios to be used in market-based valuation are Enterprise Value/Revenue (EV/Revenue) and Enterprise Value/EBITDA (EV/EBITDA). Enterprise value is the market value of debt and equity of the company less cash and EBITDA is earnings before interest, tax, depreciation and amortization. These multiples apply to a wide range of industries such as those in the industrial and consumer sectors but are not appropriate for banks, insurance companies, oil and gas exploration and production companies and real estate investment companies. EV/Revenue is more often used for stage growth companies that might have negative EBITDA.
• EV/Subscriber – This multiple is used for various subscriber-based businesses such as telecom, mobile network operators, and social media websites.
• EV/EBITA is similar to EV/EBITDA but excludes the depreciation component. This multiple is used in industries where companies have significant differences in asset financing and cannot be compared using EBITDA. This asset financing can be done in the form of ownership, operating and capital leases, and rental. Such industries are in the media, chemicals, gaming and transportation sectors.
• EV/EBITDAX is the appropriate multiple for oil & gas exploration companies. It excludes exploration expense.
• EV/EBITDAR is suitable for industries that have significant rental expenses. These industries operate in the retail and airline sectors.
• Market Cap/Book Value (“P/BV”) is used where there can be significant earnings fluctuations within the sector such as in the technology sector or where shareholder equity plays an important buffer to unexpected losses as is the case in the banking and insurance sector.
• EV/FFO uses funds from operations which is defined as net income plus depreciation and amortization and less gain on sale of property. It is used to value companies in the real estate sector in the United States.
• P/E is the stock price divided by the earnings per share. This is a very widely used valuation multiple and can be applied to various industries.
The ratios above are some of the most widely used business valuation multiples by industry but new ones are being created as industries and business models evolve. In order to be used efficiently business valuation multiples by industry should be applied with a great deal of judgment to fit the valued business growth stage and circumstances.
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