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10. Credit Ratios > A Pragmatic Point on Valuations

A Pragmatic Point on Valuations

The preceding section highlighted EBITDA multiples for valuing a company. Using EBITDA multiples is a quick and fairly efficient way to derive enterprise values. Ratios such as EV/EBITDA are frequently used as a valuation measure. Another common multiple used in the equity market is the price/earnings ratio. Ultimately these methods are shorthand versions of or proxies for discounted cash flow (DCF) analysis, which is the best way to measure cash-flow-producing assets. These equity multiples likely represent the aggregate of what the universe of investors think is the right DCF value for a company.

Perhaps you think of a company’s breakup value and assign a value to undeveloped real estate on a per-square-foot basis. The ultimate buyer probably will factor in the net present value of the cash flows he or she could generate from that property over time to determine the price.


  

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