Five Aspects Of Market Multiple Analysis: Analysis Approaches

Register to read the introduction… It is important to know the financial condition of a business in order to know whether the business have the financial capacity to perform its mission. Usually judgments about financial condition are made on the basis of financial statement analysis, which focuses on the data contained in a business’s financial statements (i.e. 1. the income statement, 2. the balance sheet and 3. the statement of cash flows). Financial statement analysis is applied both to historical data, which reflect the results of the past managerial decisions, and to forecasted data, which comprise the roadmap for the business’s …show more content…
A company/business would be an appropriate comparable if it shares a similar risk and growth profile as the company/business being valued. Market multiple analysis approach is easy to apply and is widely used, but suffer from several serious limitations.
The five steps of the market multiple analysis approach are:
1) Identify comparable companies: Criteria such as growth, technology, clientele, size and leverage are used to identify comparable. Comparable companies should, as far as possible, have financial ratios similar to each other and to the company being valued.
2) Calculate key ratios for comparable companies: The ratio can be expressed as: V/x, where V= value of the firm or firm’s equity, and x is some financial variable such as earnings, cash flow, book value, sales or even some physical characteristic. V/x is calculated across the comparable companies for several choices of x.
3) Average the key ratios: Discard the outliers and average the ratios of other comparable companies to calculate the average ratio that should be applied to the company being valued. Such average ratios should be calculated for each financial variable that is used for