Explain valuation by multiples approach. Rationale behind various multiples.

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Accepted Answer

Valuation by multiples approach involves comparing a company's financial metrics to those of similar companies in the same industry.

Multiples are ratios that compare a company's stock price or enterprise value to a financial metric such as earnings, revenue, or book value.
Common multiples include price-to-earnings (P/E), price-to-sales (P/S), and enterprise value-to-EBITDA (EV/EBITDA).
The rationale behind using multiples is that companies in the same industry with similar financial metrics should have similar valuations.
However, multiples can be affected by factors such as growth prospects, risk, and capital structure.
Therefore, it is important to use multiples in conjunction with other valuation methods to arrive at a comprehensive valuation.

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