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Multiples valuation is one of the simplest ways to price an asset by comparing it to similar ones. Whether you’re buying a car, house, or valuing a company, the process is the same: compare assets with similar characteristics.
For example, when looking at homes, you can use the price per square foot to compare values. Similarly, in company valuation, multiples like price-to-earnings ratios help estimate market value.
While multiples are quick and easy to apply, sophisticated investors use them alongside other methods, like DCF, to validate results and factor in market sentiment. The three most common types of valuation multiples are based on earnings, sales, and industry indicators.
Earnings multiples, like Price/Earnings (P/E) and Enterprise Value/EBITDA, are preferred as they reflect a company's ability to generate cash flow, which is key for investors.
However, in cases where a company isn't profitable or has volatile earnings, sales multiples can be used instead, provided the companies being compared have similar growth potential.
The downside of revenue multiples is that they don’t account for profitability.
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