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Numerical Examples

Select Multiples

These examples illustrate the calculation and interpretation of various multiples.

1. Price-Earnings (P/E) Ratio:

  • Company: GrowthCo

    • Market Capitalization: $800 million
    • Net Income (Trailing 12 Months): $40 million

    Calculation:

    • P/E Ratio = Market Capitalization / Net Income = $800 million / $40 million = 20

    Interpretation: Investors are willing to pay $20 for each dollar of GrowthCo's earnings.

2. PEG Ratio:

  • Company: FastTrack Inc.

    • P/E Ratio: 25
    • Expected Earnings Growth Rate (Next 5 Years): 20%

    Calculation:

    • PEG Ratio = P/E Ratio / Earnings Growth Rate = 25 / 20 = 1.25

    Interpretation: For every 1% of growth, investors are paying 1.25x. It is considered that PEG ratios less than 1 indicate possible undervaluation

3. Price to Book Ratio (P/B):

  • Company: ValueBank

    • Market Capitalization: $500 million
    • Book Value of Equity: $250 million

    Calculation:

    • P/B Ratio = Market Capitalization / Book Value of Equity = $500 million / $250 million = 2.0

    Interpretation: Investors are willing to pay $2 for each dollar of ValueBank's book value of equity.

4. Enterprise Value to EBITDA Multiple (EV/EBITDA):

  • Company: CashFlow Corp

    • Market Capitalization: $600 million
    • Debt: $200 million
    • Cash: $100 million
    • EBITDA: $100 million

    Calculation: First, find Enterprise Value: Enterprise Value = Market Cap + Debt - Cash = $600 million + $200 million - $100 million = $700 million

    • EV/EBITDA = Enterprise Value / EBITDA = $700 million / $100 million = 7.0

    Interpretation: The entire company is valued at 7 times its EBITDA.

5. Enterprise Value/Sales (EV/Sales):

  • Company: RevGrowth Inc.

    • Enterprise Value: $400 million
    • Revenue: $800 million

    Calculation:

    • EV/Sales = Enterprise Value / Revenue = $400 million / $800 million = 0.5

    Interpretation: The entire company is valued at 0.5 times its annual revenue.

6. Enterprise Value/Book Value (EV/Book Value):

  • Company: AssetHeavy Co.

    • Market Capitalization: $300 million
    • Debt: $150 million
    • Cash: $50 million
    • Book Value of Equity: $200 million
    • Book Value of Debt: $150 million
    • Total Capital = Book Value of Equity + Book Value of Debt - Cash

    Calculations: First, calculate Enterprise Value (EV): Enterprise Value = Market Cap + Debt - Cash = $300 million + $150 million - $50 million = $400 million

    Then, calculate Total Capital: Total Capital = Book Value of Equity + Book Value of Debt - Cash = $200 million + $150 million - $50 million = $300 million

    • EV/Book Value = Enterprise Value / Book Value of Total Capital = $400 million / $300 million = 1.33

    Interpretation: The company is valued at 1.33 times its book value of total capital.

7. Tobin’s Q:

  • Company: Infrastructure Ltd.

    • Market Value of Equity: $250 million
    • Debt: $50
    • Book Value of Assets: $200 million

    Calculation (using the simplified approximation):

    • We use MVE + Debt as an approximation for Market Value of Assets = 250 + 50 = $300
    • Tobin’s Q = Market Value of Assets / Book Value of Assets = $300 million / $200 million = 1.5

    Interpretation: The market values the assets of Infrastructure Ltd. at 1.5 times their book value (approximating the replacement cost). This suggests the company has created value above its asset base.

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