FINM3005 · Corporate Valuation
Trading and Transaction Multiples
A multiple is (what you pay) ÷ (what you get) — price per dollar of earnings, EBITDA, sales or book — and roughly 80% of equity-research reports and over half of acquisition valuations lean on them. The deep point this chapter drills is that a multiple is an implied DCF: every multiple embeds the same fundamentals (growth, risk/WACC, ROIC, leverage), so used with discipline it is a fast cross-check and used carelessly it imports someone else's mistakes. You learn the four-step discipline (define, describe, analyse, apply), the key multiples and what makes each rich or cheap (P/E rises with growth and payout, falls with risk; EV/EBIT rises with growth and ROIC, falls with WACC and tax), and the cardinal consistency rule — numerator and denominator must refer to the same claimholders (EV-to-firm, price-to-equity). The chapter distinguishes trading comps (current listed multiples, no control premium) from transaction comps (multiples paid in past deals, embedding a control premium, so they run higher), shows how to pick a tight peer set and handle dilution, and builds the football field that triangulates value as a range and cross-checks the DCF.
What this chapter covers
- 01What a multiple is, and why it is an implied DCF
- 02The four-step discipline: define, describe, analyse, apply
- 03P/E and its drivers (growth, payout, risk, leverage)
- 04EV/EBITA vs EV/EBITDA, EV/Sales, P/B and their drivers
- 05Trading comps vs transaction comps (the control premium)
- 06Peer selection and dilution
- 07The football field: triangulating value as a range
Worked example: an EV/EBITDA valuation, bridged and cross-checked
- +1Check consistency. EV/EBITDA is a firm-level multiple → it yields an enterprise value that must be bridged to equity; EBITDA is applied uniformly across peers and subject (no EBIT/EBITDA mixing).
- +1(a) Pick the multiple and apply. Use the median 8.0× (robust to skew): implied EV = 8.0 × 360 = $2,880m.
- +1Bridge to equity. Equity = EV − net debt = 2,880 − 800 = $2,080m; per share = 2,080 / 200 = $10.40.
- +1(b) Range, not a point. The 7×–9× spread implies EV $2,520–$3,240m → equity $1,720–$2,440m → $8.60–$12.20 per share.
- +1(c) Reconcile the DCF. EV $3,000m → equity $2,200m → $11.00/share, which sits inside the comps band — the two methods triangulate.
- +1Read it. The DCF lands just above the comps midpoint, implying a slight premium to the peer median — consistent with a marginally higher ROIC or growth. Plot the football field and compare to price for the call.
Key terms
- Multiple (as an implied DCF)
- A ratio of what you pay to what you get (P/E, EV/EBITDA, EV/Sales, P/B). Every multiple embeds the same fundamentals a DCF makes explicit — growth, risk/WACC, ROIC, leverage — so a multiple is a DCF in disguise. If you cannot say which fundamental makes a peer trade rich or cheap, you are guessing, not valuing.
- Claimholder consistency
- The cardinal rule that a multiple's numerator and denominator must refer to the same claimholders. Enterprise-value multiples pair with firm-level metrics (EBITDA, EBITA, sales, invested capital); equity multiples pair with equity metrics (net income, book equity). P/Sales is internally inconsistent — use EV/Sales. Equity-to-equity, firm-to-firm, always.
- EV/EBITA
- The default enterprise multiple, using EBITA (earnings before interest, tax and amortisation of acquired intangibles) so acquisitive and organic peers stay comparable. EV/EBITDA suits capital-intensive peers where current depreciation differs from future capex; EV/NOPLAT suits peers with different tax rates. EV/EBIT rises with growth and ROIC, falls with WACC and tax.
- Trading vs transaction comps
- Trading comps are current market multiples of listed peers and embed no control premium (minority prices). Transaction comps are multiples paid in past M&A deals and embed a control premium plus expected synergies, so they run higher. Use transaction comps to value a takeover, trading comps to value a minority stake; do not mix them without adjusting.
- Football field
- A chart plotting the low–high value band implied by each method — DCF, trading comps, transaction comps, the 52-week range, an LBO floor — on one per-share axis. The overlap of the bands is the defensible range; the current price sits in, above or below it. It is the centrepiece of the composite valuation.
Trading and Transaction Multiples FAQ
What is the single biggest multiples mistake?
Numerator–denominator claimholder mismatch — putting an equity price over a firm-level metric (P/Sales) or an enterprise value over net income. Always match: EV pairs with firm-level metrics (EBITDA, EBITA, sales, invested capital), price pairs with equity metrics (net income, book equity). A close second is mixing earnings lines — comparing an EV/EBITDA peer to an EV/EBIT subject silently inflates the subject; pick one earnings line and apply it uniformly across every peer.
Why prefer EV/EBITA over P/E or EV/EBIT?
P/E is the most quoted but least reliable multiple — it mixes in non-operating items and is sensitive to capital structure (leverage raises the cost of equity and net-income volatility). EBIT is dragged down by amortisation of acquired intangibles (non-cash, non-replenishable), so acquisitive and organic peers are not comparable. EBITA adds that amortisation back, making EV/EBITA the default; switch to EV/NOPLAT when peers face different tax rates and EV/EBITDA when they differ in capital intensity.
How do I pick a peer group?
A good peer shares the same industry and similar growth, profitability (ROIC) and risk/leverage — the very fundamentals that drive the multiple. A broad industry average of 30 loosely-related firms hides exactly those differences; a tight handful of true comparables beats it. Adjust for the differences you cannot avoid (a higher-growth subject deserves a premium to a slower peer's P/E). The assignment expects 2–5 named peers and 2–3 multiples.
When I value with an EV multiple, why do I subtract net debt?
Because an EV multiple gives you an enterprise value, so you must bridge to equity by subtracting net debt (a P/E multiple, by contrast, gives equity value directly). Use net debt, or equivalently gross debt minus excess cash — never subtract gross debt and forget to add the cash back. The two routes must agree, and reporting a range rather than a single point is what triangulates the DCF.
Exam move
Treat multiples as a disciplined cross-check on the DCF, never a substitute. Internalise the four steps (define with claimholder consistency, describe the peer distribution and use the median when skewed, analyse the driving fundamental, apply with a tight peer set) and be able to state for each multiple what makes it rich or cheap. The two consistency rules — EV-to-firm/price-to-equity and one uniform earnings line — protect most of the marks. Always bridge an EV multiple to equity correctly (subtract net debt, never double-count cash), report a range from the peer spread, and finish by plotting the football field so the comps and the DCF triangulate. Distinguish trading from transaction comps by the control premium, and remember that a sharp DCF-vs-comps divergence is information: one of your inputs disagrees with the market.
