In plain English
Relative valuation prices a company the way an estate agent prices a house: find similar ones that recently sold, work out the price per square metre, and apply it. In finance the square metre is a financial metric — revenue, EBITDA, earnings — and the price per unit is the multiple.
The advanced view
Every multiple is a collapsed DCF. EV/EBITDA rises with growth and returns on capital and falls with reinvestment intensity and risk, so a peer trading at a higher multiple is telling you something about growth, margin durability or risk — not simply that it is expensive. Multiples are for comparison and communication; the DCF is for understanding what drives them.
Peer selection decides the answer, so it is where you spend the effort. Screen on business model and end market first, then size, growth and margin, then geography and capital intensity. Six to ten tight comparables beat twenty loose ones. Write down explicitly why each name is in the set, because the first interviewer question is always 'why is that a comparable?'.
Multiples and consistency
EV = Market cap + Debt + Minorities + Preferred − Cash EV multiples pair with pre-interest metrics: Revenue, EBITDA, EBIT, unlevered FCF Equity multiples pair with post-interest metrics: Net income (P/E), Book equity (P/B) Implied EV = Metric × Peer multiple; Equity value = EV − Net debt PEG = P/E / Growth rate (%) Multiple from fundamentals: EV/EBIT ≈ (1 − t)(1 − g/ROIC) / (WACC − g)
Which multiple, when
EV/Revenue
Pre-profit or loss-making companies, early-stage software, biotech. Only meaningful within a narrow margin band.
EV/EBITDA
The default for capital-structure-neutral comparison across leverage. Blind to capex, so poor for very asset-heavy or asset-light contrasts.
EV/EBIT
Better when depreciation genuinely differs, because it charges for the assets consumed.
P/E
Banks, insurers and stable mature companies where capital structure is part of the business model.
P/B and P/TBV
Financials, where book equity is the regulated capital base. Pair with ROE: P/B ≈ (ROE − g)/(COE − g).
Sector metrics
EV/subscriber in telecom, EV/EBITDAR in leasing-heavy retail, EV/kW in power, EV/ARR in SaaS.
Three mechanics separate a real comps table from a spreadsheet of ratios. Forward beats trailing, because value depends on the future and trailing multiples are distorted by whatever just happened. Calendarize so every company is on the same year-end — a company with a June year-end must be interpolated onto December before you take a median. And adjust the metrics: strip one-off restructuring, litigation and gains on disposal, capitalise or normalise leases consistently, and treat capitalised R&D the same way across the set.
Worked example: from peer median to equity value per share
Step 1 of 9
- 1Peer forward EV/EBITDA: 8.2x, 9.0x, 9.4x, 10.1x, 12.6x
Precedent transactions are the third leg. They use actual prices paid for whole companies, so they embed a control premium and, usually, buyer-specific synergies — which is why precedent multiples sit above trading comps. They are backward-looking and cycle-dependent: a deal struck at the top of a credit cycle tells you little about today. Use the most recent, most similar three to five deals, note the announcement date, and adjust for the market environment before quoting them.
Must know cold
- ✓Numerator and denominator must agree: EV with pre-interest metrics, equity value with post-interest metrics.
- ✓Bridge EV to equity value with net debt, minorities and preferred every single time.
- ✓Use the median, not the mean, and show the range.
- ✓Precedents > trading comps because of the control premium; DCF sits alongside both on the football field.
- ✓Higher growth, higher ROIC, lower risk all justify a higher multiple — say which one explains the gap.
Common pitfalls
- ×Comparing a forward multiple for one company against a trailing multiple for another.
- ×Using market cap where enterprise value is required, so leverage differences pollute the comparison.
- ×Applying a peer median to a company with a materially different growth or margin profile without adjustment.
- ×Including a peer in the middle of its own takeover — its price already embeds a premium.
- ×Quoting a single number instead of a range with the driver of the spread explained.
Essential vocabulary
- Football field
- Chart of valuation ranges from DCF, trading comps, precedents and LBO, shown side by side.
- Calendarization
- Restating peers onto a common fiscal year so multiples are comparable.
- Trading comps
- Multiples of listed peers, reflecting minority stakes without a control premium.
- Precedent transactions
- Multiples paid in completed deals, including control premium and expected synergies.
- Clean EBITDA
- EBITDA normalised for one-offs and accounting choices, the basis a buyer will actually pay on.
Exercises
Try each one on paper before revealing the worked solution.
Exercise 1
A peer set trades at 11x EV/EBITDA. Your target has EBITDA of 250, net debt of 400, 50 of minorities, 90 of cash already netted in the debt figure and 120m shares. Precedent deals cleared at 13.5x. Give a per-share range.
Exercise 2
Two software companies: A grows 25% with 20% EBITDA margin at 6x EV/Revenue; B grows 8% with 30% margin at 3x EV/Revenue. Which is more expensive?
Exercise 3
Structuring exercise: a client wants a fairness view on selling a division. Which peer set do you build, and what would make you reject it?
EV/EBITDA plotted against growth or margin usually lines up. The line tells you what the market pays for the driver, and the vertical distance tells you whether a company is genuinely cheap or just lower quality — the cleanest defence against a naive peer average.