The key question, then, becomes how best to control for
differencesinthesevariableswhendoingrelativevaluation.
That is the question we examine in the next section.
APPLICATIONS OF EQUITY MULTIPLES
Now that we have looked at the determinants of equity
multiplesandhowthemultipleschangeasthefundamental
variableschange,wecanturnourattentiontotheproverbial
bottom line. In this section, we begin by looking at the
conventional useof multiplesin sectorsto make valuation
judgmentsandthenextendourdiscussiontoentiremarkets.
Wealsoconsiderhowtocomparemultiplesacrosstimeand
across markets.
Comparing Equity Multiples across Firms in a Sector
The most common approach using equity multiples is to
chooseagroupoffirmsinthesamesectorasthefirmthatwe
are tryingto value, to calculatethe average value for the
multipleforthisgroup,andtosubjectivelyadjustthisaverage
for differences between the firm being valued and the
comparable firms. While doing this, analysts implicitly
assumethatfirmsinthesamesectorareequallyriskyandthat
controlling forrisk is therefore not necessary. Evenif we
accept this heroic assumption as reasonable, relative
valuations range across the spectrum. Some relative
valuationsdonotcontrolforanyoftheothervariablesthat
wearguedaffect themultiplesthatfirms tradeat,whereas
others do control at least partially for some of the differences.
Reviewingthedeterminantsofequitymultiplesfromearlier
inthechapter,weoutlineallofthevariablesthataffecteach