What Is Market Multiples Analysis?

A market multiples analysis is a financial modeling method of assigning a value to assets or to a business. Market multiples analysis is also referred to as direct comparison analysis or comparable companies analysis. Used as an alternative approach to a discounted cash flow valuation, a market multiples analysis uses comparable companies to devise valuations.

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A market multiples analysis allows a financial analyst to compare valuations of companies based on various characteristics such as size, growth or financial ratios. It's an alternative to discounted cash flow valuation.

A market multiples analysis can compare companies based on size, industry classification, financial ratios, customers, growth, leverage and technology. Increased reliability and a stronger financial analysis are obtained when comparison companies are highly similar. Usually a financial analyst determines what comparison factors are most important and finds companies that are similar based on these factors.

As a market multiples valuation example, an analyst may decide a new company that creates software for the internet may be best compared against other internet-based firms or against software companies. For large corporations with multiple divisions or groups, a market multiples analysis can be performed on the individual units within the company.

Market multiples analysis can be performed against as many different companies as required to obtain a reliable valuation. For a general reference perspective, a single company analysis can be performed. For more critical analysis and a high level of accuracy, a market multiples analysis should be performed against a significant number of companies within the same industry.

Market multiples analysis takes each company to be compared and calculates the primary comparison ratios. Standard financial ratios include liquidity ratios, asset turnover ratios, financial leverage ratios, profitability ratios and dividend policy ratios. An average of the comparison ratios is performed, and it results in an assessment value.

Based on the resulting value, an analyst makes a valuation judgment based on non-financial indicators and may make adjustments accordingly. For example, if an analyst knows a company has recently made a large acquisition that has skewed financial results temporarily, she may make adjustments to the analysis.

Market multiples analyses are easy to understand, apply and use because there is no need for projecting cash flows. Information is also easy to obtain from published reports of publicly traded companies like 10-K submissions or annual reports. A market multiples analysis is a commonly used tool in the legal and investment banking fields.

On the downside, it can be difficult to find good comparable companies to match up against the analysis company. Without a comparable company, results can be unreliable and can lead to a wide range of valuations. A market multiples analysis also excludes the time value of money and cost of capital from a company’s valuation. For example, a market multiples analysis excludes finance charges and interest.

A market multiples analysis is a good tool when an alternate valuation method is not appropriate due to a short company tenure or rapid growth. Comparison figures should be taken from the same time period from each company to exclude external seasonal or financial market fluctuations.