VALUE MEASURMENT: RELATIVE VALUATION

Finance: Measuring the value of the enterprise

Value measurement

• Definition & Relevance

• Techniques for measuring the value of an
enterprise
o Discounted Cash Flows
o Relative valuation → today
(theory and exercises)
o Value proxies
o Risk-based indicators

If we want to measure the value of an enterprise we can use some measurement techniques. The most precise
approach to define the value of the company is that of using discounted cash flow methodologies. There are also other
approaches that can be used in order to define the value of the of a company; now we will see another approach which
is called relative valuation.

If we want to measure the value of an enterprise, the most appropriate approach is to use discounted cash flow
techniques; the discounted cash flow methodology measures in a punctual way, the economic value of the of a
company; this is applied either by using an asset side or an equity side approach, which means that we are able to
compute the enterprise value or the equity value.

Agenda

Estimating cash flow is not so simple and there is another approach which is widely used: the relative valuation
approach.

• Relative Valuation
o Definition and relevance
o Steps to apply relative valuation
o Concluding remarks

An example to introduce relative valuation

Just to give you the idea of how relative valuation works, let's take
this example. Let's assume that we are considering the
opportunity to buy a house and we have different houses. We
have the prices of the house in a given area and then, we have the
size of the apartment and then we have the price per square
meter. We have different dimensions of the apartment and
different prices. Now the point is: let's assume that we have a house, that has this size, which is its price? So how can
we define the value of a certain house?

If we want to define the cost of a certain House for which we don't

have the price, what we do is that we simply take comparable
apartments and we identified an average price per square meter
and these average price per square meter is multiplied by the size
of the apartment we are interested. If we have in mind this logic,
this is exactly the same logic that we can use for relative valuation.
What is the price of a 1650 sq ft house? Price ? 1650 * 65.51 = $ 108,092

So relative valuation is an approach that is used in the moment in which we want to define the value of an enterprise;
typically relative valuation is used in the moment in which the enterprise for which we want to know its value is a non
listed company.

From DCF Methods to Relative Valuation

• Relative valuation methods do not try to determine a company’s intrinsic worth based on its estimated future
free cash flows discounted to their present value.
• But, they determine a company’s value based on market observation, by comparing a firm value to that of its
competitors.
• These methods are also referred to as multiples methods.
• In relative valuation, the value of an asset is compared to the market value for similar (or “comparable”) assets
• It compares the (target) company with other similar listed ones.

What is relative valuation? relative valuation is a methodology which defines the value of an enterprise by using
multiples rather than forecasting the future cash. And this approach is called relative valuation because the value of
the company is defined by considering the value of similar enterprises. So the idea is something like this: we have a
target company for which we want to define its value; our target company is a non-listed company and we say “but
what is its enterprise value or what is its equity value?” In order to answer to this question, if we apply relative
valuation, what we do is that we select a group of comparable companies which are similar somehow. And once we
have identified these similar companies, we will select a certain parameter that we will use to estimate the value of
our companies. This is the approach of the relative. So by definition it is less precise than the Discounted cash flow. Say
differently, if we want to estimate the value of a company alpha, the value of the company alpha will be the average
of listed companies similar to Alpha.

Relative Valuation and the definition of the value of an enterprise

How can we then define the value

of our target company? The
formula is very simple and says
that the value of the enterprise
for which we want to estimate its
value is given by multiple multiply
by a certain reference
parameter? But what are the
multiple and the reference
parameter?

The reference parameter is a figure that represents the value generated by the company, such as EBIT, sales, or EBITDA.
We choose the reference parameter based on what we believe best reflects the company’s value generation. For
example, if sales are seen as the key driver of value, then we use sales as the reference parameter; if EBITDA is a better
indicator of growth, then we use EBITDA.

The multiple, on the other hand, is derived from comparable companies. It’s a ratio calculated as either enterprise
value or equity value divided by the chosen reference parameter. For instance, if we decide on an enterprise value-to-
EBITDA multiple, we compute this ratio for each comparable company, take an average, and then multiply this average
multiple by the reference parameter of our target company.

In summary, we use a market-based multiple of comparable companies and multiply it by the reference parameter of
our target company to estimate its value.
Relative Valuation and the definition of the value of an enterprise: example

This is the practical application of multiple. Let's assume that we

want to estimate the value of a generic company A. For our
target company the reference parameter is EBITDA. Since our
target company is company A which is an un listed company, we
know that the EBITDA of our target company is 1500 euro. What
is the multiple? The multiple is a ratio between the value and
the reference parameter. The value that we have identified is
the enterprise value divided by the reference parameter that
will be the same, which is the EBITDA. And our multiple is 10
times. That multiple is computed by making the average of
comparable companies. What does it mean that these multiple is 10 times? The enterprise value of our company is 10
times the EBITDA of our target company. This is the idea of applying multiples. So practically we arrive at defining, the
enterprise value, simply by multiplying a parameter of the company, which is a value that we know because we are
analyzing that company, by a certain multiple .

Relative valuation

Relative Valuation is pervasive

• Most valuations on Wall Street are relative valuations

• Almost 85% of equity research reports are based upon a multiple and comparables
• More than 50% of all acquisition valuations are based upon multiples
• Rules of thumb based on multiples are often the basis for final valuation judgment

Relative Valuation: main steps

1. IDENTIFYING COMPARABLE COMPANIES

2. DEFINING POSSIBLE MULTIPLES
3. ANALYZE MULTIPLES
4. APPLY MULTIPLES

STEP 1 IDENTIFYING COMPARABLE COMPANIES

Comparable companies

“A comparable firm is one with cash flows, growth potential, and risk similar to the firm being valued. It would be
ideal if we could value a firm by looking at how an exactly identical firm- in terms of risk, growth and cash flows - is
priced.

Nowhere in this definition is there a component that relates to the industry or sector to which a firm belongs. Thus,
a telecommunications firm can be compared to a software firm, if the two are identical in terms of cash flows, growth
and risk.

In most analyses, however, analysts define comparable firms to be other firms in the firm’s business or businesses.
[….].The implicit assumption being made here is that firms in the same sector have similar risk, growth, and cash flow
profiles and therefore can be compared with much more legitimacy.

The identification of comparable companies is one of the most difficult tasks of this approach to valuation

▪ Identify the value drivers of the target companies

▪ Identify those companies with the same value drivers
▪ Define companies’ specificities:
 o Sector
o Geographical Market
o Presence of divisional structure
o Size(assets or sales)
o Presence or not of comparative advantages
o Innovation/development models
o (accountingprinciples)

“In the context of valuing equity in firms, the problems [of finding comparable assets] are compounded since firms in
the same business can still differ on risk, growth potential and cash flows” (Damodaran, 2002).

So, step one is the identification of the comparable companies; so we are in a situation in which we have our target
company and then we need to select some listed companies that are comparable with our target ones. How can we
select these comparable companies?

A comparable company is a company that has a similar cash flow, a similar growth potential and as a risk similar to
the one that we are analyzing. So say differently, which are the items from the balance sheet or from annual reports
that you can take in order to have an idea of cash flow growth potential and risk? Revenues, debts ecc. Typically if we
have data on cash flow operating, we will keep that one.

Then the best way is also to select a company that operates in the same industry. But we know that this is not always
possible, so sometimes we can select as comparable companies even companies operating in completely different
sectors. For example if we want to estimate the enterprise value of a company operating in the clothing industry, if we
are lucky and if we have companies in the clothing industry having the same risk, the same growth potential and the
same cash flow, that would be perfect. But we know that sometimes this does not happen. In selecting comparable
companies, you give priority to cash flow growth potential and similar risk, even if the industry is another one.

If a company is leveraging its growth on providing high quality product, we will select a comparable company whose
driver for growing is represented by high quality product. If my company is a company whose driver for growth is to
keep the product as cheap as possible, probably I will select a company with the same drivers that are used in order to
generate value. In the ideal world we should select comparable companies if they are similar. If they operate in the
same market with the same dimensions for growth, and then share similar the same risk, the same cash flow, and a
very similar growth potential.

STEP2: DEFINING POSSIBLE MULTIPLES

2. Possible multiples

Once comparable companies are identified, market values need to be converted into standardized values, since the
absolute prices cannot be compared

Just like with the discounted

cash flow method, multiples can
be used to estimate either the
enterprise value or the equity
value of a company. This is why
we differentiate between asset-
side multiples and equity-side
multiples. Essentially, a multiple
is simply a value divided by a
parameter.

The numerator of the multiple represents the value, which can be either the enterprise value or the equity value. This
choice is important because it determines what we’re ultimately estimating. For instance, if we want to estimate
enterprise value, we need to use the enterprise value of each comparable company as the numerator. Similarly, if we
want to estimate equity value, we use the equity value for each comparable.

Now, let’s discuss the denominator. Since the

multiple is a value divided by a parameter, we
choose a parameter that reflects the
company’s return on investment. This
parameter could be revenues, earnings, cash
flow, or book value.

In summary, the multiple is simply a ratio of a

certain value (enterprise value or equity
value) divided by one of these parameters.
This structure allows us to estimate the value
of a target company by comparing it to other
similar, publicly listed companies.

Our multiples, which are calculated as a value

(such as equity value or enterprise value)
divided by a chosen parameter, can be
categorized into asset-side multiples—if they
estimate the market value of the enterprise—or
equity-side multiples, if they estimate the
market value of equity.

Assume we have selected enterprise value and

EBITDA as our parameters and have identified a
set of comparable companies. In practice, for
each company in our list of comparables, we
estimate the market value of the enterprise and
divide it by the EBITDA of that company. This
process yields a ratio for each comparable company. We then calculate the average of these ratios.

The average enterprise value/EBITDA ratio derived from all the comparable companies represents the multiple that
we will use in our analysis

2. Possible multiples – the relationship between E and EV

Depending on the fact that you

are using the equity value or
the enterprise value, you will
estimate something different;
you also have to take into
consideration that enterprise
value and equity value are connected with each other. So once you have one, you can compute the other and vice
versa.Remember the reclassification of the balance sheet of a company and the distinction between investments and
coverge; the market value of the enterprise is nothing than the equity value plus the net financial position or the
financial debts. Because if you remember the flow of cash, we say that once the company invests money into projects,
the return of the money from project is called enterprise value. But from the enterprise value, if we deduct all the
exchanges with debt holders, we arrive at the money available for shareholders. So for this reason, we can say that the
market value of the enterprise is nothing than the equity value plus the net financial position (where the net financial
position or net financial debt is given by financial debt minus cash).
Possible multiples: example

Company Alpha has the following Balance Sheet.

For example, if you have this data about a

certain company, you know that the market
capitalization of our company is 10,000, how
can we define its enterprise value?

You also know that the market capitalization of the company is 10,000€ What is EV?

We know that the enterprise value is the equity plus the net financial position. We know the
market capitalization which is 10,000. We know that the net financial position is given by
debts minus cash. Financial debts are 3000. Cash is 1500. We have that the enterprise value
of our company is 11500.

In defining our multiple we can use asset side multiples and equity side. Let's start from the asset side multiples. If we
are using asset side multiples, we are keeping the enterprise value of the comparable companies divided by a certain
parameter.

2. Possible multiples: Asset side (EV)

• EV multiples take as reference (numerator) the Enterprise Value of comparable companies

• The main assumption is that if a sample of comparable companies is valued by the market a certain number
(n) of times a given parameter, the target company, can be valued the same way.
• In economic terms, the multiple represents the number of years the parameter should be multiplied by to
obtain the company EV.

Some more details on the type of multiples that we can use. In defining our multiple we can use asset side multiples
and equity side. Let's start from the asset side multiples. If we are using asset side multiples, we are keeping the
enterprise value of the comparable companies divided by a certain parameter.
2. Possible Multiples - Enterprise Value

EV/EBIT

• Advantage:focus on operating management

• Disadvantage: it does not consider different choices in Depreciation and Amortization (→ cash)

EV/EBITDA

• Advantage: good proxy of cash (THE MOSTUSED!)

• Disadvantage: neglect CAPEX for different industries

EV/FCFF

• Advantage: is a cash flow

• Disadvantage: less stable than other indicators

EV/Sales

• Advantage: if the above multiples are negative, the multiple is meaningless; in those cases an alternative is
using sales
• disadvantage: it does not consider profitability

[Which are the differences between these multiples? Let's see 1 by 1.

- A possible multiple is the enterprise value divided by EBIT. The enterprise value is already given by the market
value while the denominator is given by the book value. Which is the advantage of using the enterprise value
divided by EBIT? The advantage is that we have the EBIT as a parameter, which is an indicator that represents
the ability of the company managing its operation. If you remember the meaning of EBIT, the higher the EBIT,
the higher the ability of the company to generate revenues and reducing operating costs. So it's very good as
a parameter because it gives the idea of the ability of the company generating operating results. The main
problem of the EBIT, which is also the reason why it is not so diffused, is that it is affected by the policies
connected with depreciation and amortization. If you remember the formula of EBIT, its revenue minus
operating costs , but within the operating cost, you have depreciation and amortization. So for this reason EBIT
tends to be not so diffused because it is affected by the depreciation policies
- The most used indicator from the asset side perspective is the enterprise value divided by the EBITDA. This is
the most diffused because is not affected by depreciation and amortization. There are some disadvantages
because if you think about the EBITDA, of course you have the idea about the operating cycle of a company,
but EBITDA does not provide any idea on the investments (EBITDA still it's something that you keep from the
P&L and you don't have an idea about the amount of investments of the company).
- Then we have a third possible multiples which is given by the enterprise value divided by FCFF that instead
consider investments. It has the advantage of being directly a cash flow measure. Typically, is not so used
FCFF simply because it's not a data that you can keep directly from annual report. So it's something that you
need to estimate and compute in an analytical way. It is not usen even because since it is a cash based indicator,
if a company concentrate in one year some cash inflows or outflows, this is affected by some huge amount of
cash that maybe a company receives or does not receive in a certain period of time. So for this reason it's less
stable because it is affected by the fact that your cash inflows and outflows can be not connected with the
exactly fiscal year of the company because you can anticipate or participate some cash in or out.
- Finally, there is another multiple which is represented by sales. So you keep the enterprise value and divides
by sales. The enterprise value divided by sales is the only indicators that you can use in the case in which
your comparable companies shows negative value. EBIT and the EBITDA can be negative; how can you apply
multiple if your parameter is negative? Are you saying that the value of the company is a negative value so If
you have the parameter which is negative, you cannot apply the multiple; for this reason if one of the
previous parameter is negative, sometimes sales is your unique solution. So sales is a parameter which is
 used typically as the last choice when all the other parameters are negative. Sales do not consider anything
about you operating cost, you just have an idea of revenues.

Enterprise value: example

2. Possible Multiples - Equity Value

The Equity multiples let the analyst to directly evaluate the company’s equity value

Numerator → market capitalization of the company

The market capitalization of the company is given by the price of the stock on the official exchange multiplied by the
number of outstanding shares.

We need to do the same reasoning for the multiples equity side. If we are using multiples equity side, we put at the
numerator the market value of the equity for company or the market capitalization of our company divided by a certain
parameter. Since we are estimating the equity value, not the enterprise value, we cannot use the EBIT or the EBITDA.
Since in this case we want to estimate the value for shareholders, the equity value, we use other types of multiples.

Possible multiples – Equity value

• P/E (or PE) = market price / earnings = market price per share / earnings per share (EPS)
o advantage: quick
o disadvantage: affected by depreciation, amortization, profit or loss of discontinued operations.
• Selecting price and EPS:
o price: usually the current price; sometimes, average price over last 6 months or year
o EPS:earnings referred to most recent financial year (current), most recent four quarters (trailing),
expected in the next fiscal year or next four quarters (leading), some future years
• Interpreting values
o High P/E: a company's stock is overvalued, or investors are expecting high growth rates in the future
o Low P/E: a company is undervalued or a company is doing exceptionally well relative to its past trends
o N/A: a company has no earnings or it is posting lossesè

[The most commonly used multiple is called Price to Earnings (P/E), expressed as P divided by E. P/E is a very common
metric and is easily identifiable from the market. What does Price to Earnings mean? It is abbreviated as PE and
represents a ratio between the market price of one share and the earnings per share (EPS). If a company is publicly
listed, obtaining this data is straightforward. The advantage of using the P/E ratio is that it is extremely quick and easy
to calculate.

What is the main problem with using Price to Earnings? The main issue is that this ratio is affected by depreciation,
amortization, and profit and loss from discontinued operations.

Why is this so? How do we compute earnings per share? EPS is taken from the last line of the income statement, also
known as the P&L. The final line, which is the net profit, is divided by the total number of shares to obtain EPS.
If we recall the structure of the income statement, we start with revenues and subtract operating costs, finance costs,
and discontinued operations. The net profit is affected by depreciation, amortization, and profit and loss from
discontinued operations, because we take the bottom line and divide it by the number of shares. Therefore, since net
profit is considered, it is influenced by all these accounting decisions made by the company.

Which price should we use? How do we determine the numerator and denominator of our multiple? When
considering the numerator, which is the market price of the share, we know that stock prices fluctuate. The question
becomes: which market price should we use? This is a decision we need to make. We can use the current market price,
the average price of the last week, or the average price of the last six months. There is no absolute best choice, but
typically an average price is used to smooth out market fluctuations.

What about the denominator, earnings per share? We can use the EPS from the last financial year, known as current
EPS, by referring to the annual report. Alternatively, we can use the most recent four quarters’ EPS, called trailing EPS,
or the expected EPS for future periods, called leading EPS. Once we select the numerator and denominator, we can
calculate the P/E ratio, which is often already available.

How do we interpret the P/E ratio? If a company has a P/E ratio of 10, 12, or 50, a high P/E suggests that the company’s
stock may be overvalued, indicating high market expectations for future growth. The higher the P/E, the greater the
expectation. Conversely, a low P/E indicates that the company may be undervalued, or it may have faced challenges
compared to past performance. For individual investors, a low P/E could signal an opportunity to buy, as the share
price is low, and the company may have potential for future growth].

Equity value – example

2. Possible Multiples - Equity Value

• PEG:the ratio between the P/E and the earning growth

• advantage: This allows better considering the growth perspectives of the company(CAGR)
• disadvantage: the accuracy of the PEG ratio depends on the growth rate used. Using historical growth rates may
provide an inaccurate PEG ratio if future growth rates are expected to deviate from historical growth rates.

To distinguish between calculation methods using future growth and historical growth, the terms forward PEG and
trailing PEG are sometimes used.

[There are two most important Equity multiple: One is price and earning the other one Is very similar and It's called
Peg, that is still the price on earning, but adjusted by the growth of the company. P/E is the same, but we are adding
G to take into consideration the expected growth in the earnings of our company. So the idea of price on earning
considering the growth is simply that we are dividing the price on earning by the expected growth of the company; so
you could see that this is more precise because it keeps the previous parameters P/E and this is divided by the expected
growth of the company. The main disadvantage is that It's not so simple to estimate the percentage of growth of the
company, of course.]
2. Possible Multiples - Equity Value

Let's take this example. Let's assume

that you have two companies, company
A and Company B. You could see P/E
ratio of the two companies, growth
rate, and then you have the P/E
considering the growth; which of the
two companies is the best one for
investing? So if we look at the data, we
could see that If we look at the price on
earning It seems that this company
could be more convenient if we need to
buy share because it has a price and
learning which is a little bit lower; but if we look at the expectations of growth, it seems that this one is more convenient
because even though it's more expensive, the expectations to grow are a little bit higher compared to the other. So the
main advantage of using price on earning adjusted by the growth is simply given by the fact that in the second case we
take into consideration the expectations of growth of the company. How do we compute these growth rates? There
are different ways. It could be an estimation percentage defined by the company as expected grow; It can be an
estimation by the market. Sometimes it is simply computed as the increasing in the earnings per share from one year
to another.

2. Possible Multiples - Equity Value

Typically you will never compute these multiples because they are given. If you go on the Stock Exchange, you can
already find price on earning, price on earning adjusted by the growth, enterprise value on EBIT, on EBITDA. So in the
majority of the cases these data are given, so your problem will not be to compute the parameter. So the crucial
difficulties is not in computing the multiple that is given but is in the selection of comparable companies and in the
picking up the multiples that fits better the company that you are estimating.

We have other types of multiples; sometimes you can also find the price divided by the book value or in other cases,
it's the price divided by the free cash flow To equity. They exist, I would say they are even there are any use, but just
to be aware that they exist.

Other Equity Side multiples

• P/BV: the ratio between the market capitalization of a company and its Equity (Share Capital + Reserves +
Profit(Loss) of the year)
• P/FCFE: the ratio between the market capitalization of a company and its FCFE
 How do we select multiples? If we consider the P&L,
in general terms, the further up we are in the P&L,
the more generic the analysis becomes. For
example, if we use enterprise value to sales, we are
evaluating the company based on its ability to
generate sales without considering any aspects of its
operations or investments.

Is using sales a good proxy? It is not incorrect and

can be a suitable proxy if the critical success factor
of the company is its ability to sell products. If the
company's value is largely derived from its sales
performance, then using sales as a parameter makes sense. However, it can be considered too generic because it does
not take into account the efficiency of operations or other operational details.

The more you move down the income statement, the more you incorporate aspects of operational efficiency. For
instance, using the price-to-earnings (P/E) ratio takes into account the true essence of the business, as it reflects
various underlying dynamics. However, the issue with the P/E ratio is that earnings are influenced by accrual
accounting principles, such as depreciation, amortization, and potential unexpected discontinued operations.

In conclusion, there is no single "best" parameter. The optimal parameter depends on the nature of the business and
the specific industry in which the company operates.

STEP 3: ANALYZE MULTIPLES

3. Analyse and select multiples

When using multiples to evaluate a business, the values obtained are likely to be different using different multiples,
and deciding which multiple to use can make a big difference to the value estimate... Hence…how can we pick one
multiple?

• “Cynical approach”: use the multiple that best fits your objective.
• “Statistical approach”: use the multiple that has the highest R- squared in the sector when regressed
against fundamentals.
• “Bludgeon computed. approach”: use all the multiples that you have computed
• “Value driver approach”: use the multiple that seems to make the most sense for a specific sector, given
how value is measured and created in that context

3. Analyse and select multiples - Cynical approach

The analyst could use the multiple that best fits his story:

• if he is trying to sell a company, he could use the multiple which gives the highest value for the company;
• if he is buying the same company, he could choose the multiple that yields the lowest value.

While this clearly crosses the line from analysis into manipulation, it is a common practice, calling for some cautions
when reading a report produced by a third party.

[The first approach is something which is called cynical approach. Say differently you will select the multiples that
allows you to define the value of the company that you want. What do I mean? Why do we need to define the value
for a company? The reason why we are interested in defining the value of a company is because either we are buying
or selling that company. So using a cynical approach you will compute the value of the company playing with numbers
in a positive way, until you arrive at the number that you want to show to the other part. So if you are selling probably
you will use the multiple that show the highest value because you are selling and you want high value of the company.
If you are buying you will use the multiple that you will show a lower value of the company because you want to save
money in the acquisition. Using a cynical approach simply means that depending on the reason why you want to define
the value of the company, you will select multiple will show a high or low value depending on the interest that you
have].

Then there is a second

option which is a little
bit more objective,
which is a statistical
approach. So in an
objective way, we have
the possibility to select
a multiple using
statistics and so making
a regression analysis
and considering the
multiples that better
represent the dynamic
of that certain
parameter. We will not see the statistical approach.

3. Analyse and select multiples - Bludgeon approach

The bludgeon approach consists in using all the multiples computed, however, putting them together in an overall
evaluation:

• Range of values, with the lowest value obtained from a multiple being the lower end of the range and the
highest value being the upper limit (the range could be large)
• Average of the values obtained from the different multiples (the average weight in the same way different
multiples)
• Weighted average, with the weight on each value reflecting the precision of the estima

[The third approach is that you use all the multiples and then again you will select the multiples that you think is more
appropriate compared with that specific analysis].

3. Analyse and select multiples –Value driver approach

Managers in a very sector tend to focus on specific variables when analyzing strategy and performance. The multiple
used will generally reflect this focus.

[Last approach, which is the value driver

approach. What do I mean? I mean that in
our exercise we will select the multiples by
considering the parameter that is more
connected with how the company in that
specific industry generate value. So in our
exercises we will try to see how the company
generates value. So for example, if a company
generates value from Software, if a company
generates value from subscriptions, if a company generates value from Hard investments… we will try to see the source
of value generation for our company. And that source of value generation will be the reference parameter that we will
select for our multiples.
• In applying value driver company by company, you need to identify how a company generates value. There are
some dynamics by industry. I mean that if we keep, for example, some industries, we can say that on average within
that specific industry, there are some value drivers that seems to be a proxy for that industry to generate value.
For example, if we have company operating in the retail industry, you cannot generate value by operations; you
are retailing, so you are buying and then you sell. So using EBIT or EBITDA is not of added value because where you
are generating value is given exactly by your sales. So we expect, let's say that company operating in the retail
industry are vocalized on maximizing the selling of the products in the store. And this is the reason why typically in
companies operating in retail the most diffused parameter is enterprise value on sales. The reason why it's simply
because in the retail sector you don't have operations, mainly you don't have the transformation of inputs into
outputs. You are focused on maximizing the sales in your stores.
• What happened in itech industry? The Itech company are companies that have the highest potential of growth
because the I tech is a very dynamic industry where we expect to have a very fast growth. For this reason, since
the growth is the crucial item for high tech company, the price on earning or price on earning adjusted by growth
is the main multiple that is taken into consideration.
• If we have company operating in the infrastructure industry or company that makes a heavly use of the assets,
typically we expect that the parameter that best represents their growth is represented by EBITDA. It does not take
into consideration depreciation, but it takes into consideration the operating cycle.
• Finally, in the real estate, typically we use price on cash flow. This is this is just, let's say, the average by sector, then
of course company by company you need to see which is the item of value generation for that company, But on
average these are the dynamics by industry].

[There are already some

multiples available online. If
you go on the website of the
modern, which is one of the
most well known worldwide
finance professor of the New
York University, you can see
industry by industry an
average value of enterprise
value over EBITDA or
enterprise value divided by
EBIT].
STEP 4: APPLY MULTIPLES

The last step is the computation of the EV or E depending on the scope of the analysis

Is relative valuation quick and simple? Multiples are easy to use and easy to misuse

Apply multiples: an example – Luxury Company (LUX)

Now the computation of

multiples can be somehow
synthesized here. Let's assume
that our target company is a
company like Tod and let's
assume that we have selected
two comparable companies.
For the two comparable
companies the Louis Vuitton
group and the Barbary Group
we have identified the
multiples; so we have the
reference parameter for our
target company and the multiples; so for our tops company we can estimate the enterprise value and the equity value
if we have the net financial debt.

Concluding remarks (i)

• A number of authors have argued that multi-period valuation models based on discounted cash flows or residual
income are superior to single-period multiple valuation approaches, which are likely to result in less accurate
valuations.
• However, the empirical evidence on valuation models used by professional investors and financial analysts stands
in contrast to the theoretical superiority of multi-period valuation models. The strongest and most consistent
empirical finding is the primary importance of the P/E ratio

Concluding remarks (ii) – risks of using RV

• Multiples are a fast approach to evaluate an enterprise, but they can be misleading in some situations, such as
o Shocks to an industry or the broader market
o Periods of heavy investment
o Cyclical companies
o Changes in strategy or business model

[Final warning: using multiples for analyzing the value of the company is widely diffused practice. It's very common,
much more than discounted cash flow. But as I think you can imagine. using multiples even though it's very fast, has
some drawbacks. If you change the comparable companies, you can arrive at a different value. If you select the
wrong multiples, you will arrive at different values. So it's very subjective the definition of this value and in particular,
it's the multiple that can makes a difference].

Picture: underlines how i the airline industry, the average value

of the EBITDA changes by year.