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Numerical Examples

Standardized Values and Multiples

These examples illustrate the calculation and application of common multiples in relative valuation.

1. Earnings Multiples:

  • Company: TechGrowth Inc.

    • Market Capitalization: $500 million
    • Net Income (Trailing 12 Months): $50 million
    • Expected Net Income (Next 12 Months): $60 million
    • Expected Earnings Growth Rate (Next 5 Years): 15%

    Calculations:

    • Trailing P/E Ratio: Market Capitalization / Trailing Net Income = $500 million / $50 million = 10.0
    • Forward P/E Ratio: Market Capitalization / Expected Net Income = $500 million / $60 million = 8.33
    • PEG Ratio: Trailing P/E Ratio / Expected Earnings Growth Rate = 10.0 / 15 = 0.67

  • Company: EnergyCorp

    • Enterprise Value (EV): $2,000 million
    • EBITDA: $400 million
    • EBIT: $300 million

    Calculations:

    • EV/EBITDA: Enterprise Value / EBITDA = $2,000 million / $400 million = 5.0
    • EV/EBIT: Enterprise Value / EBIT = $2,000 million / $300 million = 6.67

2. Book Value Multiples:

  • Company: BankOne

    • Market Capitalization: $300 million
    • Book Value of Equity: $200 million
    • Total Assets: $1,000 million
    • Book Value of Liabilities: $700 million
    • Debt: $200 million
    • Cash: $50 million

    Calculations:

    • Price-to-Book Ratio (P/B): Market Capitalization / Book Value of Equity = $300 million / $200 million = 1.5

    • Calculate Book Value of Capital:

      • Book Value of Capital = Book Value of Equity + Debt - Cash = $200 million + $200 million - $50 million = $350 million

    • EV/Book Value of Capital: Enterprise Value / Book Value of Capital

      First Calculate Enterprise Value (EV): EV = Market Cap + Debt - Cash = $300 million + $200 million - $50 million = $450 million

    EV/Book Value of Capital: $450 / $350 = 1.29

  • To Calculate Tobin's Q, we will approximate the Market Value of Assets as Market Value of Equity + Debt = $300 + $200 = $500

    • Tobin's Q: Market Value of Assets / Book Value of Assets = $500 million / $1,000 million = 0.5

3. Revenue Multiples:

  • Company: RetailFast Inc.

    • Market Capitalization: $200 million
    • Revenue: $400 million
    • Enterprise Value: $500 million

    Calculations:

    • Price-to-Sales Ratio (P/S): Market Capitalization / Revenue = $200 million / $400 million = 0.5
    • EV/Revenue: Enterprise Value / Revenue = $500 million / $400 million = 1.25

4. Sector-Specific Multiples (Examples):

  • Real Estate (REIT): REIT Properties

    • Market Capitalization: $600 million
    • Funds From Operations (FFO): $60 million
    • Price/FFO: $600/$60 = 10

  • Oil & Gas: EnergyPro Ltd.

    • Enterprise Value (EV): $5,000 million
    • Proven Oil Reserves: 500 million barrels
    • EV/Proven Reserves: $5,000/500 = $10 per barrel

These examples provide a clear illustration of calculating and interpreting various multiples. Remember that the context and comparability of the companies are crucial for accurate relative valuation.

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