Valuation: Measuring and Managing the Value of Companies, Fifth Edition

14

Using Multiples to Triangulate Results

Discounted cash flow (DCF) analysis is the most accurate and flexible method for valuing projects, divisions, and companies. Any analysis, however, is only as accurate as the forecasts it relies on. A careful multiples analysis—comparing a company’s multiples with those of similar companies—can be useful in making such forecasts and the DCF valuations they generate more accurate. Such an analysis can help test the plausibility of cash flow forecasts, explain mismatches between a company’s performance and those of its competitors, and support useful discussions about which companies the market believes are strategically positioned to create more value than other industry players.

Exhibit 14.1 presents the trading multiples for eight large specialty retailers, including Home Depot, as of December 2009. (Comparing Home Depot with only home improvement competitors would have been more revealing, but other large-scale home improvement retailers, such as Menards, are not publicly traded.) The left side of the exhibit presents four types of market data: the value of equity (referred to as market capitalization), the value of debt, gross enterprise value (the combined value of debt and equity), and net enterprise value (gross enterprise value less nonoperating assets).¹⁷¹ The right side of the exhibit presents three multiples: net enterprise value divided first by next year’s projection of revenue, then by earnings before interest, taxes, depreciation, ...