Rather than trying to value a company in isolation, compare it to similar businesses using financial multiples.
Key Multiples:
| Multiple | Formula | What It Tells You |
|---|---|---|
| P/E | Price ÷ Earnings | How much you're paying for $1 of profit |
| EV/EBITDA | Enterprise Value ÷ EBITDA | Clean valuation across capital structures |
| P/B | Price ÷ Book Value | Good for banks or asset-heavy companies |
| PEG Ratio | (P/E) ÷ Earnings Growth Rate | Adjusts P/E for growth — lower is better |
How It's Used:
- Find a group of comparable companies (same industry, size, region).
- Calculate their multiples.
- Compare the company you're analyzing to peers.
Example: If Company A has a P/E of 10, and peers average 15, Company A might be undervalued (or riskier).
When to Use:
- Fast-growing companies (where DCF is harder)
- Comparing companies in the same sector
- Benchmarking private company valuations to public comps