Consistency
Every multiple has a numerator and a denominator. The
numeratorcanbeeitheranequityvalue(suchasmarketprice
orvalueofequity)orafirmvalue(suchasenterprisevalue,
whichisthesumofthemarketvaluesofdebtandequity,net
ofcash).Thedenominatorcanbeanequitymeasure(suchas
earningspershare,netincomeorbookvalueofequity)ora
firmmeasure(suchasoperatingincome,EBITDA,orbook
value of capital).
One of the key tests to run on a multiple is to examine
whether the numerator and denominator are defined
consistently. If the numerator for a multiple is an equity
value,thenthedenominatorshouldbeanequityvalueaswell.
Ifthenumeratorisafirmvalue,thenthedenominatorshould
beafirmvalueaswell.Toillustrate,theprice-earningsratio
isaconsistentlydefinedmultiple,sincethenumeratoristhe
price per share (which is an equity value) and the
denominatorisearningsper share(which isalso an equity
value).Soistheenterprisevalue-to-EBITDAmultiple,since
thenumeratoranddenominatorarebothfirmvaluemeasures;
the enterprise value measures the market value of the
operatingassetsofacompanyandtheEBITDAisthecash
flow generatedby the operating assets, prior to taxesand
reinvestment needs.
Arethereanymultiplesinusethatareinconsistentlydefined?
Considertheprice-to-EBITDAmultiple,amultiplethathas
acquiredadherentsinthepastfewyearsamonganalysts.The
numerator in this multiple is an equity value and the
denominator is a measure of earnings to the firm. The
analystswhousethismultiplewillprobablyarguethatthe