Damodaran on Valuation

9.4. APPLICATIONS OF VALUE MULTIPLES

Now that we have identified the variables that affect each multiple and have a sense of how changes in these variables can affect enterprise value multiples, we can turn our attention to using these multiples in relative valuation. In this section, we begin, as we did the equity multiple application section, by looking at comparisons of companies within individual sectors and then look at marketwide comparisons.

9.4.1. Sector Comparison

As with equity multiples, enterprise value multiples are used by analysts to compare firms within a sector. Even more so than with equity multiples, little is done to control for differences across firms in sample. Thus, while an analyst comparing P/E ratios across software companies will at least consider differences in growth rates across the companies, analysts often just compare the enterprise value-to-EBITDA multiples across cable or telecom companies, with no consideration given to fundamental differences across the companies. In this section, we look at three illustrations, which present three ways of controlling for differences across companies, paralleling the approaches used with equity multiples.

9.4.1.1. Subjective Judgments

This is the simplest extension of the naive approach, where after comparing the values of enterprise value multiples across companies, we at least pause and consider the variables that we know affect those multiples to see if they explain the differences. Thus, we would examine ...