What is a Multiple?

A valuation multiple is simply an expression of market value relative to a key
metric assumed to relate to that value. This metric – whether earnings, cash flow or some other measure – must bear a logical relationship to the market value observed; to be seen, in fact, as the driver of that market value.

There are two main types of multiples:

#Enterprise multiples express the value of an entire enterprise – the value of all claims on a business – relative to a statistic that relates to the entire enterprise, such as sales or EBIT.

#Equity multiples, by contrast, express the value of shareholders’ claims on the assets and cash flow of the business. An equity multiple therefore expresses the value of this claim relative to a statistic that applies to shareholders only, such as earnings (the residual left after payments to creditors, minority shareholders and other non-equity claimants).

#Enterprise vs. Equity Multiples

We have summarized in the table below the relative advantages of each of the multiples: