Business Valuation Review

Volume 34 N Number 4
’ 2015, American Society of Appraisers

Valuation Using Industry Multiples: How to Choose

the Most Relevant Multiples
Edouard Chastenet, SFAF, and Alain Marion, SFAF

Our research focuses specifically on the methodology to be applied to improve the

relevance of the multiples-based valuation method regarding the identification of the
most relevant multiples (i.e., that reduce the relative absolute valuation error within any
industry-based peer group). In line with prior empirical studies, our results confirm that
Enterprise Value multiples based on EBIT and EBITDA perform better, compared to
Sales and Capital Employed, and that multiples based on forward-looking EBIT and
EBITDA are more relevant compared to corresponding actual earnings. In the absence
of forward-looking earnings, available at the date of valuation, our study shows that
EBITDA multiples provide better estimates than EBIT multiples do. Beyond these
general results, the approach implemented in our research can be easily reproduced
by practitioners (e.g., financial analysts, M&A advisors, independent appraisers) to
identify case-by-case the multiples that are the most relevant within any industry-
based peer group.

The multiples method, also referred as the guideline
public company or transaction method, is becoming more
widely used to value any company in most valuation
contexts (such as financial analysis, mergers and acquisi-
tions, or fairness opinions provided by independent
appraisers). This “popularity” can be explained by its
relative “simplicity” compared to the discounted cash-
flows method and by its “objectivity” because it is based
on the value of comparable companies than can be
directly observed on the market. However, researchers
and practitioners agree that it is little studied, often
misunderstood, and sometimes misapplied (Crow, Gibbs,
and Harms 2001).
This article presents the results of a study that
compares the relevance of different valuation Enterprise
Value multiples (EV multiples), also referred to as Market
Value of Invested Capital multiples (MVIC multiples).
Beyond the results of general application, we show how
the recommended approach is able to improve the
efficiency of the evaluation process and therefore the
relevance of the values obtained by the multiples method.
Theory and Practice
It is customary to consider only three approaches in
valuing a business: (1) income based, (2) market based,
and (3) asset or cost based. These approaches are available
in practice in a set of three of the most common valuation
methods: (1) the discounted cash-flows method (DCF), (2)
the multiples method, and (3) the net revaluated asset
method (suitable for real estate companies or industrial
companies externalizing low profitability).
Most surveys show that the DCF method and the
multiples method derived from comparable listed com-
panies are predominantly used by practitioners (Chastenet
and Jeannin 2007; Harbula 2009). Confirmed by current
practice and increasingly addressed in valuation text-
books (Hitchner 2006; Koller, Goedhart, and Wessels
2007), the multiples method is also considered by many
valuation and accounting standards (FASB 2001; ISVC
2001). Its ease of use and its direct reference to market
valuation of comparable listed companies tends to
obscure the fact that the multiples method is based on
solid theoretical foundations.

Theoretical background

Edouard Chastenet is an associate professor at the
Business Administration Institute (IAE) of Université
de Lyon, France. Alain Marion is a professor at the
Business Administration Institute (IAE) of Université
de Lyon, France.
The DCF method and the multiples method rely on
common theoretical foundations, in that they can be
directly related to the theoretical model of discounted
cash flows, whose authorship can be attributed to
Williams (1938) and Modigliani and Miller (1958,

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Business Valuation Review
1961). The discounted dividend method (DDM) was
initially derived by the former from the theory of interest
sets by Fisher (1907) and applied to the valuation of
equity shares. The DCF method owes much to the latter
authors, the founders of modern finance, Nobel Laureates
in Economics in 1990 and 1985 respectively, in that it
leads the evaluator to distinguish the stream of cash flows
generated by the assets of the company and the stream of
cash flows generated by its shares.
To apply the DCF method one should determine the
future free cash flows that may be generated by these
assets (regardless of its financing structure). The
evaluators then use the weighted average cost of capital
and the capitalization formula of Gordon and Shapiro
(1956) to discount these cash flows to perpetuity. The
value obtained by applying this method is the so-called
debt-free/cash-free value of the company, also called the
Enterprise Value.
The multiples method is notably based on the principle
of market efficiency developed by Fama (1970), which
states that stock prices reflect more or less all the
information available to investors: All things being equal,
the multiples method assumes that the market is efficient
enough to value similar assets at similar price (Esty
2000). In other words, when the multiples method is
applied for valuing the shares of a privately held company
whose shares are not listed, the method is assumed to
provide the value that the business would have if it was
itself listed.
According to the theoretical model of discounted free
cash flows, the multiples method assumes that it is
possible to identify publicly traded companies, said to be
comparable, in that they have a profile of free cash flows,
growth prospects, and a level of risk similar to those of
the company that is being valued. Considering the single-
period model derived from the Gordon and Shapiro
(1956) formula,1 a simplification of the discounted free
cash-flows method, any synthetic valuation estimated
multiple (Mest) derived from a sample of comparable
companies can be assimilated to a capitalization factor
applied to the expected free cash flow (CF) of the
company to be valued (considering its discount and
growth rates, hereafter referred as k and g):
1
The “Gordon and Shapiro” formula provides the present value of
a perpetual stream of future expected cash flows, considering a discount
rate of k and a constant cash-flow growth rate of g. This formula is a one-
period–based simplification of the DCF model where the free cash flows of
the company being valued are expected to grow at a constant growth rate in
perpetuity. In that model the discount rate corresponds to the weighted
average cost of capital.
Page 174
Vest ~ Mest | CF,
where Mest 5 1/(k2g).
Any estimated value derived from the application of
that estimated valuation multiple necessarily yields
a valuation error corresponding to the difference between
the company’s estimated value (Vest) and its observed
market value (Vobs):
Vobs ~ Mest | CF z Error,
where Error 5 Vobs – Vest.
Multiple-based valuation in practice
The multiples valuation method consists in applying
multiples derived from the observed value of a sample of
comparable companies (also referred as a “peer group”),
in the form of synthetic multiples corresponding to the
arithmetic mean or median, to the free cash flow of the
company to be valued.
In practice, to calculate valuation multiples, the
appraiser will use financial aggregates (published or
estimated) that are the most representative proxy of both
the company’s and its peers’ ability to generate free cash
flows over a long period: EBIT (earnings before interest
and tax) and/or EBITDA (earnings before interest, tax,
depreciation, and amortization) should prevail and to
a lesser extent Sales (or Revenues) and Capital Employed
(or Invested Capital).
Under these conditions, the value of any business can
be expressed when it is observed on the market for
a listed company or estimated in the form of a multiple
applied to these financial aggregates (FA), considering
the following generic formula:
Vest ~ MFA
est | FA and
Vobs ~ MFA
est | FA z Error,
where FA 5 l 3 CF (that is, said to be proportional to CF).
The apparent simplicity and explicability of the
multiples method is certainly the source of its success.
It is thus possible to evaluate any privately held company
by applying synthetic valuation multiples representative
of the valuation level of a sample of comparable listed
companies. Those multiples can also be used to measure
a trading premium/discount of any listed company
relative to its industry peers.
To identify these comparable listed companies it is
customary to (1) consider companies within the same
’ 2015, American Society of Appraisers

industry as the company to be evaluated, also referred as
“industry peers”; then, within these industry peers, to (2)
select those that are the most comparable in terms of
profitability and growth prospects. To calculate those
synthetic valuation multiples, it is customary to (1)
consider financial aggregates directly issued from the
financial statements of both the company and its peers,
such as Sales, EBITDA, EBIT, and/or Capital Employed
and (2) calculate the median or average of the multiples of
the referred the “industry peer group.”
That being said, appraisers are often using their
“professional” judgment, more or less formalized, in
regard to both the selection of comparable listed
companies and the choice of valuation multiples.
The apparent simplicity of that method and the place
accorded to judgment lead some academics and profes-
sionals to believe that this method can be misapplied,
resulting in a risk of unexpected valuation error and/or
voluntary manipulation of the result of the evaluation.
Three questions are being raised by the community of
appraisers:
N What are the financial aggregates that should be
used to calculate valuation multiples (Capital
Employed, Sales, EBITDA or EBIT, actual, trailing,
or forward-looking)?
N What are the key performance indicators that should
be used to select the most comparable listed
companies within a peer group based on industry-
based primary selection?
N Should multiples be combined and with what
weighting?
We propose here some answers to the first question, in
the form of general results and a methodology that could
be applied in each case by appraisers and that would
prevail on professional judgment to choose the most
relevant valuation multiples.
Related Literature
The relative performance of multiples has been
regularly addressed in empirical research on the multiples
method. Kim and Ritter (1999) examined the use of
several multiples for valuing IPOs and found that the use
of the price to earnings (P/E) multiple based on forecasted
earnings leads to a superior accuracy relative to those of
multiples based on book value, trailing earnings, cash
flows, and sales. Baker and Ruback (1999) compared the
performance of multiples based on EBITDA, EBIT, and
sales. Their results show that industry-adjusted EBITDA
performs better than EBIT and sales. Liu, Nissim, and
Thomas (2002) studied the performance of a list of value
drivers and found the general ranking for multiples: (1)
Business Valuation Review — Winter 2015
Valuation Using Industry Multiples
forward earnings, (2) historical earnings, (3) cash flows
and book value, and (4) sales.
Lie and Lie (2002) arrived to the following conclusions
regarding the relative performance of multiples: (1) the
total enterprise value/book value multiple generally yields
better value estimates than sales and earnings multiples
(total enterprise value/EBIT and total enterprise value/
EBITDA), especially for financial but also for non-
financial firms; (2) the use of forecasted earnings instead
of trailing earnings improves the estimates of the P/E
multiples; and (3) the EBITDA multiple generally yields
better estimates than the EBIT multiple, except for
pharmaceutical companies.
Liu, Nissim, and Thomas (2007) discovered for their
sample a higher accuracy of earnings than those of
operating cash flows and dividends. After the shift from
reported numbers to forecasted ones, they obtained higher
valuation performances for all multiples. They revealed
that earnings still had the best performance in this case
because their accuracy increased more than those of the
other two measures.
These studies are generally based on U.S. and/or
international data.
Herrmann and Richter (2003) examined different
multiples (P/E, EV/EBIT, EV/EBITDA, P/B [price to
book], EV/Invested Capital, and EV/Sales) for European
nonfinancial firms. They asserted, consistent with the
results of Liu, Nissim, and Thomas (2007), that (1)
multiples based on earnings lead to the highest prediction
accuracy and (2) sales multiples yield the lowest pre-
diction accuracy. However, they discovered that the
P/B multiple performed better than the EV/EBITDA
multiple when comparable firms were selected based on
ROEs and earnings growths instead of only the industry
membership.
Another study that used European data and investigat-
ed the relative performance of different multiples is that
of Schreiner (2007). He found that (1) equity value
multiples outperform entity value multiples, (2) knowl-
edge-related multiples outperform traditional multiples in
science-based industries, and (3) forward-looking multi-
ples outperform trailing multiples. The trailing multiples
from Schreiner (2007) are in the following decreasing
order from the viewpoint of accuracy: earnings multiples
(P/E, P/Earnings before tax, P/EBIT, and P/EBITDA),
cash-flows multiples (P/Operating cash-flow and P/
Dividends), book value multiples (P/IC, P/B, P/Total
assets), and gross income and sales multiples.
Data and Research Methodology
Since the market price of comparable listed companies
can be considered one of the repositories that may be
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Business Valuation Review
useful to investors in valuing a business (among others,
intrinsic value derived from the DCF or the net revaluated
asset methods), the multiples method is even more
relevant if it reduces the difference between the
company’s estimated value and its market value as if it
was listed, or its observed value as it is itself listed.
Sample companies and data
The study we conducted compares the relative absolute
valuation error (RAVE) resulting from the application of
the most common valuation multiples for a sample of
listed companies within industry peer groups.2 To set the
sample, we used data from FactSet: market capitalization,
actual financial statements (i.e., invested capital and net
debt), and financial analysts’ Sales, EBITDA, and EBIT
earnings estimates consensus.
As of March 31 of each year, we selected firm-years
that satisfy the following criteria:
(1) Western European companies disclosing consol-
idated financial statements in IFRS GAAP
(2) All required data being nonmissing and non-
negative for fiscal years 2006, 2007, and 2008 (i.e.,
all multiples can be observed and are positive)
(3) Each industry-year peer group including at least
five companies
(4) All multiples lying within the 5th and 95th
percentiles of each fiscal year.
The resulting sample includes 919 observations in
2006 representing 24 countries and 59 industries, 1,090 in
2007 (24 countries and 66 industries), and 1,192 in 2008
(27 countries and 70 industries).
Valuation multiples used for the study are those that
appear the most frequently considered by financial
analysts by reference to the studies of Chastenet and
Jeannin (2007) and Harbula (2009): Enterprise Value
(EV) to Sales, EBITDA, and EBIT (supplemented by the
companies’ Capital Employed multiples: EV/CE) where
financial aggregates refer to actual (subscript: 0), current
(subscript: 1), and forecast (subscript: 2) data, as reported
by financial analysts, both for the former (actual) and the
latter (current and forecast), and consolidated by FactSet
in its consensus.
Relative absolute valuation errors
For any company within a peer group, we defined the
valuation error resulting from the application of industry-
based multiples as the difference between its estimated
value (Vest) and its observed value (Vobs) and the relative
2
The results of that study were also published in French in the Revue
Française de Gestion (Astolfi, Chastenet, Marion, and Thauvron, 2014).
Page 176
absolute valuation error (RAVE) as the absolute ratio
between this difference and the company’s observed
value:
jVobs {Vest j
RAVE ~ :
Vobs
Alternatively, any RAVE can be calculated by
comparing any estimated multiple (Mest) and its corre-
sponding observed multiple (Mobs):
jMobs {Mest j
RAVE ~ :
Mobs
For any company within a peer group, the lower the
RAVE resulting from the application of a multiple is,
the more the multiples method is relevant. It is thus
possible to compare the relevance of different multiples
by comparing the RAVE resulting from their application.
Within a peer group or a sample of comparable comp-
anies the most relevant synthetic valuation multiples
(EV/Sales, EV/EBITDA, or EV/EBIT) are those that
minimize the average RAVE within the sample.
All things being equal, one can consider that within
a peer group, the valuation multiple that should be used to
identify mispriced companies would be the one that
minimizes the RAVE of the companies within the peer
group. All things being equal, one can consider that for
a privately held company comparable to those composing
the peer group, the more relevant multiples would be
those that minimize the RAVE of the companies within
the peer group.
To calculate the RAVE of each company within
industry peer groups we followed the following steps:
(1) Setting industry peer groups by grouping com-
panies from the same industry according to the
best FactSet industry classification (i.e., level 2).
(2) Calculating the observed valuation multiples of
each company (considering available data as at
March 31 of each year, 2006, 2007, and 2008):
market capitalization, net debt (short-term and
long-term debt less cash and long-term invest-
ment), actual, current, and forecast Sales,
EBITDA, and EBIT given by financial analysts’
consensus (see Table 1: descriptive statistics of
multiples, as at March 31, 2008).
(3) Calculating the synthetic multiples of each
industry peer group, corresponding to the arith-
metic or the harmonic mean of the observed
multiples of their constituent companies.
’ 2015, American Society of Appraisers
 Valuation Using Industry Multiples

Table 1
Distribution of Multiples and Related Relative Absolute Valuation Errors (RAVE), European Peer Groups, March
31, 2008

CE0 Sales0 Sales1 Sales2 EBITDA0 EBITDA1 EBITDA2 EBIT0 EBIT1 EBIT2
EV Multiple
3rd Quartile (75%) 3 5.1 3 1.8 3 1.6 3 1.5 3 9.9 3 8.5 3 7.5 3 14.2 3 11.8 3 10.4
Median 3 2.8 3 1.1 3 1.0 3 0.9 3 7.8 3 6.9 3 6.3 3 11.1 3 9.5 3 8.6
1st Quartile (25%) 3 1.8 3 0.7 3 0.6 3 0.6 3 6.3 3 5.7 3 5.2 3 8.6 3 7.8 3 7.0
Standard Deviation 3 3.7 3 0.9 3 0.8 3 0.7 3 3.0 3 2.1 3 1.7 3 5.1 3 3.0 3 2.4
Mean (Harmonic) 3 2.6 3 0.9 3 0.9 3 0.8 3 7.6 3 6.7 3 6.1 3 10.6 3 9.2 3 8.2
RAVE
3rd Quartile (75%), % 58 54 52 51 34 29 27 38 30 27
Median, % 36 33 31 31 20 17 17 23 18 17
1st Quartile (25%), % 18 16 15 15 10 8 7 11 9 8
Interquartile Range, % 40 38 37 36 23 21 20 27 21 19
Mean, % 42 39 38 37 24 20 19 27 21 19
Rank-Median 10 9 7 8 5 3 1 6 4 2
Rank-Interquartile Range 10 9 8 7 5 4 2 6 3 1
Rank-Mean 10 9 8 7 5 3 1 6 4 2

Notes: EV 5 actual enterprise value (market capitalization as at March 31, 2008, plus actual fiscal year book value of net debt: minority
interests, plus other long-term liabilities and financial debts less cash and cash equivalents and other long-term investments reported by
FactSet); EV Multiple 5 company’s EV divided by the selected value drivers: CE 5 capital employed (book value of fixed assets and
working capital current assets and liabilities reported by FactsSet; 0 subscript is last fiscal year); Sales 5 revenues; EBITDA 5 earnings
before interest, taxes, depreciation, and amortization; EBIT 5 earnings before interest and taxes (0, 1, and 2 subscripts are FactSet
financial analysts’ consensus for last, current, and next fiscal year Sales, EBITDA, and EBIT). RAVE is the absolute difference between
company’s observed value and estimated value, divided by observed value. Estimated value is equal to the harmonic mean of industry
peer group’s EV multiples applied to the selected value driver of the company (that company being held in the peer group). Sample is
1,192 companies for all variables (from 27 countries and 70 industries).

Figure 1
Distribution of Relative Absolute Valuation Errors (RAVE), European Industry Peer Groups, March 31, 2008. Notes: The
lower (higher) bound of the vertical line corresponds to the 1st (3rd) quartile of the RAVE distribution. When the rectangle
in the middle of the line is gray, its bottom is the median and the top is the mean of the RAVE distribution; when it is dark,
it is the opposite.

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Business Valuation Review

Table 2
Distribution of Multiples and Related Relative Absolute Valuation Errors (RAVE), Luxury Industry Peer Group,
April 30, 2011

CE0 Sales0 Sales1 Sales2 EBITDA0 EBITDA1 EBITDA2 EBIT0 EBIT1 EBIT2
EV Multiple
3rd Quartile (75%) 3 10.5 3 3.6 3 3.3 3 2.9 3 14.2 3 11.9 3 10.4 3 18.8 3 15.4 3 13.4
Median 3 8.8 3 3.1 3 2.8 3 2.6 3 12.1 3 10.4 3 9.5 3 15.2 3 12.9 3 11.5
1st Quartile (25%) 3 5.0 3 2.4 3 2.2 3 2.0 3 11.3 3 10.0 3 8.9 3 13.0 3 11.5 3 10.2
Standard Deviation 3 12.3 3 1.3 3 1.2 3 1.0 3 4.6 3 3.7 3 3.0 3 8.7 3 6.1 3 4.5
Mean (Harmonic) 3 7.2 3 2.8 3 2.5 3 2.3 3 12.9 3 11.3 3 10.0 3 16.0 3 13.7 3 12.1
RAVE
3rd Quartile (75%), % 74 29 25 24 28 23 21 28 23 23
Median, % 41 20 21 18 14 12 12 23 19 16
1st Quartile (25%), % 22 12 11 11 7 10 7 7 9 8
Interquartile Range, % 52 17 14 14 21 14 14 22 14 14
Mean, % 47 29 28 26 19 17 16 22 20 18
Rank-Median 10 7 8 5 3 2 1 9 6 4
Rank-Interquartile Range 10 7 4 3 8 1 2 9 5 6
Rank-Mean 10 9 8 7 4 2 1 6 5 3

Notes: EV 5 actual enterprise value (market capitalization as at April 30, 2011, plus actual fiscal year book value of net debt: minority
interests, plus other long-term liabilities and financial debts less cash and cash equivalents and other long-term investments reported by
FactSet); EV Multiple 5 company’s EV divided by the selected value drivers: CE 5 capital employed (book value of fixed assets and
working capital current assets and liabilities reported by FactsSet; 0 subscript is last fiscal year); Sales 5 revenues; EBITDA 5 earnings
before interest, taxes, depreciation, and amortization; EBIT 5 earnings before interest and taxes (0, 1, and 2 subscripts are FactSet
financial analysts’ consensus for last, current, and next fiscal year Sales, EBITDA, and EBIT). RAVE is the absolute difference between
company’s observed value and estimated value, divided by observed value. Estimated value is equal to the harmonic mean of industry
peer group’s EV multiples applied to the selected value driver of the company (that company being held in the peer group). Sample is
twelve companies: Bulgari S.P.A.; Burberry Group PLC; Coach Inc.; Compagnie Financiere Richemont S.A.; Hermes International
S.C.A.; Hugo Boss AG; Luxottica Group S.p.A.; LVMH Moet Hennessy Louis Vuitton; PPR S.A.; Swatch Group AG; Tiffany & Co.;
Tod’s S.p.A.

(4) Calculating the RAVE of each company multiple, Empirical Results

by comparing its observed value to its estimated
value for each of the synthetic multiples previously
calculated.
(5) Ranking the sample companies’ RAVE according
to different statistics (quartiles, median, interquar-
tile range, and mean of RAVE).
Table 1 presents the descriptive statistics of the sample
for the multiples and RAVE as at March 31, 2008, and
the ranking of multiples according to the different statis-
tics (Figure 1 provides a graphical presentation of the
distribution of RAVE).3
As part of academic work that resulted in the article,
the validity of the results of the empirical study was based
on achieving statistical parametric pairwise comparison of
means, variances, and proportions (with similar results for
the three samples studied as at March 31, 2006, 2007, and
2008).
3
In Table 1, the observed value of each company is compared to its
estimated value resulting from the application of the synthetic multiples, the
company to be evaluated being held in the peer group. As shown in Table
A1 and Figure A1, excluding that company from the peer group provides
similar results (nevertheless, with RAVE that are logically higher).
Our study allows us to classify the most commonly used
valuation multiples according to their level of relevance
(i.e., their ability to reduce the RAVE) and thus provide the
appraisers with a set of general results that are listed below:
1. For the calculation of peer group synthetic multiples
the harmonic mean should be preferred to the
arithmetic mean (based on Liu, Nissim, and
Thomas 2007, an alternative to the use of the
harmonic mean to reduce the valuation bias is the
use of the median of the multiples).
2. Appraisers should favor the use of EV to earnings
multiples (EBITDA or EBIT) compared to multi-
ples of Sales or Capital Employed (as earnings can
be considered as better estimates of companies’
cash flows).
3. When they have them, appraisers should give
preference to the most forward-looking multiples
(current and/or forecast) (as forward-looking earn-
ings can be considered better estimates of compa-
nies’ future expected cash flows).
4. When they do not have forward-looking multiples
(often the case when valuing privately held

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 Valuation Using Industry Multiples

Figure 2
Distribution of Relative Absolute Valuation Errors (RAVE), Luxury Industry Peer Group, April 30, 2011. Notes: The
lower (higher) bound of the vertical line corresponds to the 1st (3rd) quartile of the RAVE distribution. When the rectangle
in the middle of the line is gray, its bottom is the median and the top is the mean of the RAVE distribution; when it is dark,
it is the opposite.

companies), appraisers should generally favor the
use of EBITDA over EBIT multiples (as EBITDA
would be the best estimates of cash flows; this last
result is confirmed for almost 75% of the industry
peer groups in our sample).
Beyond these general results (some of which have
already been published in the literature), one of the
interesting aspects of the RAVE analysis is that it can be
implemented by any appraiser in any valuation cases to
identify and justify the preferred use of one multiple
rather than another.
Case Studies
We address the particular case of the luxury and the
cosmetics industries considering the valuation multiples
observed as of April 2011. Table 2 and Figure 2 and
Table 3 and Figure 3, respectively, show the descriptive
statistics of multiples and RAVE for the peer groups that
are most representative of the selected industries.
At the date of valuation (end of April 2011), in the
luxury sector, considering both the mean and median of
RAVE (16% and 12%, respectively), the multiple based
of forecast EBITDA was the most relevant. In the
cosmetics industry, considering both the mean and
median of RAVE (6% and 5%, respectively), the
forward-looking EV/EBIT was more relevant than the
corresponding EV/EBITDA multiple. In that industry
case, the relevance of EBITDA for the purpose of
valuation based on the industry-based multiples method
could not be considered as the most relevant choice.
Our two case studies demonstrate that the general
results of our study can be reversed for some industries
(when comparing the relevance of the EV/EBIT and EV/
EBITDA multiples, for example). However, the RAVE
approach can be used case by case and in many valuation
contexts (e.g., M&A, Financial Analysis, Fairness
Opinions, Impairment Tests).
Conclusion
Our study reveals that many of the most common
valuation multiples do not all have the same level of
relevance when one looks at the relative absolute
valuation error (RAVE) that derives from their applica-
tion. Our empirical results are of general consideration
but need to be checked case by case. We show how the
use of RAVE can be adopted in any valuation study.
The objective of this article is to recall that the
multiples method, although it appears simple, is based on
solid theoretical foundations like the DCF method and
requires specific tools to improve the efficiency of the
evaluation process based on a value relevance measure to
mitigate the risks of unexpected errors or voluntary
manipulation of results of valuation (especially regarding
the selection of the multiples). The best multiple should
be the one that minimizes RAVE within any peer group.
In this article, we do not address other issues attached
to the multiples method raised in other empirical studies:

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Table 3
Distribution of Multiples and Related Relative Absolute Valuation Errors (RAVE), Cosmetics Industry Peer Group,
April 30, 2011

CE0 Sales0 Sales1 Sales2 EBITDA0 EBITDA1 EBITDA2 EBIT0 EBIT1 EBIT2
EV Multiple
3rd Quartile (75%) 3 15.1 3 2.5 3 2.4 3 2.3 3 15.9 3 13.3 3 11.4 3 16.9 3 15.7 3 13.5
Median 3 15.0 3 2.5 3 2.2 3 2.1 3 12.9 3 11.8 3 10.9 3 16.1 3 14.7 3 12.8
1st Quartile (25%) 3 7.0 3 1.4 3 1.4 3 1.4 3 10.5 3 11.8 3 10.3 3 13.9 3 14.6 3 12.4
Standard Deviation 3 6.3 3 1.1 3 0.9 3 0.7 3 3.4 3 1.9 3 1.7 3 3.5 3 1.0 3 0.9
Mean (Harmonic) 3 5.2 3 1.9 3 1.8 3 1.7 3 12.3 3 11.5 3 10.2 3 15.9 3 15.1 3 13.0
RAVE
3rd Quartile (75%), % 191 42 41 40 29 16 17 17 6 6
Median, % 190 36 36 36 27 16 12 13 4 5
1st Quartile (25%), % 69 32 26 25 15 2 8 6 3 4
Interquartile Range, % 122 9 16 15 14 14 9 10 3 3
Mean, % 138 48 42 38 23 12 12 15 5 6
Rank-Median 10 7 8 9 6 5 3 4 1 2
Rank-Interquartile Range 10 4 9 8 7 6 3 5 2 1
Rank-Mean 10 9 8 7 6 3 4 5 1 2

Notes: EV 5 actual enterprise value (market capitalization as at April 30, 2011, plus actual fiscal year book value of net debt: minority
interests, plus other long-term liabilities and financial debts less cash and cash equivalents and other long-term investments reported by
FactSet); EV Multiple 5 company’s EV divided by the selected value drivers: CE 5 capital employed (book value of fixed assets and
working capital current assets and liabilities reported by FactsSet; 0 subscript is last fiscal year); Sales 5 revenues; EBITDA 5 earnings
before interest, taxes, depreciation, and amortization; EBIT 5 earnings before interest and taxes (0, 1, and 2 subscripts are FactSet
financial analysts’ consensus for last, current, and next fiscal year Sales, EBITDA, and EBIT). RAVE is the absolute difference between
company’s observed value and estimated value, divided by observed value. Estimated value is equal to the harmonic mean of industry
peer group’s EV multiples applied to the selected value driver of the company (that company being held in the peer group). Sample is
five companies: Beiersdorf AG; Estee Lauder Cos.; L’Oreal S.A.; Natura Cosmeticos S.A.; Shiseido Co. Ltd.

Figure 3
Distribution of Relative Absolute Valuation Errors (RAVE), Cosmetics Industry Peer Group, April 30, 2011. Notes: The
lower (higher) bound of the vertical line corresponds to the 1st (3rd) quartile of the RAVE distribution. When the rectangle
in the middle of the line is gray, its bottom is the median and the top is the mean of the RAVE distribution; when it is dark,
it is the opposite.

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what criteria should be used to select companies that are
really the most comparable within an industry peer group
(e.g., market segment, profitability, and/or growth pro-
spects)? How can one justify the combination and the
weighting of the valuation results derived from the use
different multiples (such as Capital Employed and EBIT,
or EBITDA and EBIT)?
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Appendix different statistics, when to company to be evaluated

Table A1 presents the descriptive statistics of the is being excluded from the peer group (Figure A1
sample for the multiples and RAVE as at March 31, provides a graphical presentation of the distribution of
2008, and the ranking of multiples according to the RAVE).

Table A1
Distribution of Multiples and Related Relative Absolute Valuation Errors (RAVE), European Peer Groups, March
31, 2008

CE0 Sales0 Sales1 Sales2 EBITDA0 EBITDA1 EBITDA2 EBIT0 EBIT1 EBIT2
EV Multiple
3rd Quartile (75%) 3 5.1 3 1.8 3 1.6 3 1.5 3 9.9 3 8.5 3 7.5 3 14.2 3 11.8 3 10.4
Median 3 2.8 3 1.1 3 1.0 3 0.9 3 7.8 3 6.9 3 6.3 3 11.1 3 9.5 3 8.6
1st Quartile (25%) 3 1.8 3 0.7 3 0.6 3 0.6 3 6.3 3 5.7 3 5.2 3 8.6 3 7.8 3 7.0
Standard Deviation 3 3.7 3 0.9 3 0.8 3 0.7 3 3.0 3 2.1 3 1.7 3 5.1 3 3.0 3 2.4
Mean (Harmonic) 3 2.6 3 0.9 3 0.9 3 0.8 3 7.6 3 6.7 3 6.1 3 10.6 3 9.2 3 8.2
RAVE
3rd Quartile (75%), % 62 56 55 54 35 30 29 41 32 29
Median, % 38 35 33 33 21 18 18 24 19 17
1st Quartile (25%), % 19 17 16 16 11 8 8 12 10 8
Interquartile Range, % 43 39 38 38 24 22 21 28 22 20
Mean, % 45 43 41 40 25 21 20 29 23 20
Rank-Median 10 9 7 8 5 3 2 6 4 1
Rank-Interquartile Range 10 9 8 7 5 3 2 6 4 1
Rank-Mean 10 9 8 7 5 3 1 6 4 2

Notes: EV 5 actual enterprise value (market capitalization as at March 31, 2008, plus actual fiscal year book value of net debt: minority
interests, plus other long-term liabilities and financial debts less cash and cash equivalents and other long-term investments reported by
FactSet); EV Multiple 5 company’s EV divided by the selected value drivers: CE 5 capital employed (book value of fixed assets and
working capital current assets and liabilities reported by FactsSet; 0 subscript is last fiscal year); Sales 5 revenues; EBITDA 5 earnings
before interest, taxes, depreciation, and amortization; EBIT 5 earnings before interest and taxes (0, 1, and 2 subscripts are FactSet
financial analyst consensus for last, current, and next fiscal year Sales, EBITDA, and EBIT). RAVE is the absolute difference between
company’s observed value and estimated value, divided by observed value. Estimated value is equal to the harmonic mean of industry
peer group’s EV multiples applied to the selected value driver of the company (that company being excluded from the peer group).
Sample is 1,192 companies for all variables (from 27 countries and 70 industries).

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 Valuation Using Industry Multiples

Figure A1
Distribution of Relative Absolute Valuation Errors (RAVE), European Industry Peer Groups, March 31, 2008. Notes: The
lower (higher) bound of the vertical line corresponds to the 1st (3rd) quartile of the RAVE distribution. When the rectangle
in the middle of the line is gray, its bottom is the median and the top is the mean of the RAVE distribution; when it is dark,
it is the opposite.

Business Valuation Review — Winter 2015 Page 183