CHOOSING THE RIGHT RELATIVE VALUATION MODEL

Many analysts choose to value assets using relative valuation models. In making this choice, two basic questions have to be answered: Which multiple will be used in the valuation? Will this multiple be arrived at using the sector or the entire market?

Which Multiple Should I Use?

The chapters on multiples presented a variety of multiples. Some were based on earnings, some on book value, and some on revenues. For some multiples, current values were used, and for others forward or forecast values were used. Since the values you obtain are likely to be different using different multiples, deciding which multiple to use can make a big difference to your estimate of value. There are three ways you can answer this question: One is to adopt the cynical view that you should use the multiple that reflects your biases; the second is to value your firm with different multiples and try to use all of the values that you obtain; and the third is to pick the best multiple and base your valuation on it.