Damodaran on Valuation

18.4. CHOOSING THE RIGHT RELATIVE VALUATION MODEL

Many analysts choose to value assets using relative valuation models. In making this choice, two basic questions have to be answered: Which multiple will be used in the valuation? Will this multiple be arrived at using the sector or the entire market?

18.4.1. Which Multiple Should I Use?

In the chapters on relative valuation, we presented a variety of multiples. Some were based on earnings, some on book value, and some on revenues. For some multiples we used current values, and for others we used forward or forecast values. Since the values you obtain are likely to be different using different multiples, deciding which multiple to use can make a big difference to your estimate of value. You can answer this question in three ways. The first is to adopt the cynical view that we should use the multiples that reflect our biases, the second is to value the firm with different multiples and try to use all of the values that we obtain, and the third is to pick the "best" multiple and base our valuations on it.

18.4.1.1. The Cynical View

You can always use the multiple that best fits your story. Thus, if you are trying to sell a company, you will use the multiple that gives you the highest value for your company. While this clearly crosses the line from analysis into manipulation, it is a more common practice than you might realize. Even if you never plan to employ this practice, you should consider how you can protect yourself from ...