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Finance - Business Valuation

 
Multiples: First Principles In relative valuation, the objective is to value assets, based upon how similar assets are currently priced in the market. While multiples are easy to use and intuitive, they are also easy to misuse. Consequently, a series of tests were developed that can be used to ensure that multiples are correctly used. There are two components to relative valuation. The first is that, to value assets on a relative basis, prices have to be standardized, usually by converting prices into multiples of earnings, book values or sales. The second is to find similar firms, which is difficult to do since no two firms are identical and firms in the same business can still differ on risk, growth potential and cash flows. The question of how to control for these differences, when comparing a multiple across several firms, becomes a key one.

This article covers reasons for popularity, potential pitfalls, standardized values and multiples, basic steps for using multiples. pdf

   

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Status: 03. September 2013