Chapter 7
Valuation Ratios
What is a cynic? A man who knows the price of everything and the value of nothing.
Oscar Wilde
As the share price itself is an absolute value and therefore meaningless with regard to the valuation of a company, valuation ratios are used to compare share prices of different companies, or to determine the current valuation of the company on a stand-alone basis. This chapter deals with the calculation and interpretation of typical valuation multiples and related ratios. Multiples denote valuation ratios, which compare absolute performance indicators such as profit and sales with current market valuation. A company, for example, may trade at 12 times its net profit or twice its annual sales. Valuation ratios should therefore be seen as the market’s water-level gauge. Building on this, Chapter 8 will delve into the actual calculation of the fair value of a company, which links these two chapters. This chapter can be considered as descriptive company valuation, ‘What is the current valuation?’, the following chapter in contrast as normative valuation, ‘What should the valuation be?’ Several case studies will demonstrate the practical application and especially the interpretation of the valuation ratios. Distribution diagrams of the current valuation ratios will facilitate the assessment of given valuation levels.
The spectrum of classic valuation multiples is split into equity and entity multiples. Equity multiples compare the market capitalization of the ...
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