Business case 4 – Technical Document

How to carry out a valuation using comparable trading multiples

The trading multiples approach is an analogical valuation method according to which the value of a company's
operating assets or equity can be inferred from multiples calculated from a sample of listed comparable
companies in a given industry. For that purpose, the nature of the activities of the comparable companies has
to be as similar as possible to the target company. The value of the target company is obtained by applying the
average multiples calculated from this sample to the target’s financials. We then have:

Estimated target value = Multiple × Target financials

There are various multiples. Some of them directly estimate the equity value of the target company whereas
others only assess the market value of its operating assets (firm value to equity value adjustments must then
be made to obtain the equity value).

The equity value multiples: The application of the equity value multiples to the targets' financials directly
leads to the target value. The most commonly used equity value multiples are the price earnings ratio (PER)
and the price to book ratio (PBR):
Market Equity Value Share price
PER = = where EPS := Earnings per share
Net income (Group share) EPS
Market Equity Value
PBR =
Book Value of Shareholders' equity (Group share)

In practice, those multiples are not always the most relevant ones. The PBR does not take into consideration
the profitability of the underlying company and the PER can lead to significant errors if there is too much of a
difference between the target capital structure and the capital structure of the comparable listed companies
selected in the sample.

The firm value multiples: The application of the firm value multiples to the targets’ financials to assess leads to
the firm value of the target company. Adjustments to this firm value (cf. firm value to equity value adjustments
described in the technical document on the DCF valuation approach) are then made to obtain the equity value.
The most commonly used firm value multiples are the Firm Value to EBITDA and the Firm Value to EBIT:
Market Equity Value + Net Debt + / - other adjustments
FV / Sales =
Sales
Market Equity Value + Net Debt + / - other adjustments
FV / EBITDA =
EBITDA
Market Equity Value + Net Debt + / - other adjustments
FV / EBIT =
EBIT

In practice, the most relevant multiples are the FV/EBITDA ratio and the FV/EBIT ratio. The value of the net
debt to be used should in theory be the market value of the financial debt netted from the cash and cash
equivalents items. For simplicity, we assume in practice that the last available accounting value of the net
financial debt is a good proxy of its market value.