skills/valuation/references/modules/M047-multiples-and-relative-valuation.md

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<!-- Module: 047 | Title: Multiples and Relative Valuation -->

## PART X - VALUATION | MODULE 047

# Multiples and Relative Valuation

> Mission. Choose metrics that fit economic reality, normalize peer differences, and avoid mechanically applying averages.

## Decision output

Objective: Choose metrics that fit economic reality, normalize peer differences, and avoid mechanically applying averages. The completed work product must be reproducible from evidence, show the downstream financial or decision effect when material, state the strongest contrary case, and define a dated update rule.

## Explicit operating procedure

1. Choose valuation metrics that match the business and capital providers: enterprise value with pre-interest operating metrics, equity value with after-interest equity metrics.

1. Normalize peers for cycle, fiscal period, accounting, leases, SBC, capitalized investment, acquisitive growth, taxes, leverage, and non-operating assets before comparing headline multiples.

1. Use forward estimates only when the forecast definition and horizon are comparable; preserve dispersion and source date rather than treating consensus as one precise fact.

1. Explain multiple differences through growth, margin, ROIC, reinvestment, duration, balance-sheet risk, and earnings quality.

1. Use historical trading ranges carefully, adjusting for changed business mix, rates, capital structure, and growth economics.

1. Never average peer multiples mechanically. Derive a justified range and reconcile it with DCF/reverse-expectations evidence.

## Required evidence and model bridge

- Primary-source set: normalized forecasts, capital structure, market data, peer definitions, scenario assumptions. Preserve exact document/version, date, period, and source location for every material factual input used in multiples and relative valuation.

- For each key concept - metric selection, normalization, fiscal alignment, growth, margin, ROIC - state whether it is a reported fact, analyst calculation, management claim, external estimate, or judgment. Quantitative concepts must retain raw components and units; qualitative concepts must retain the specific evidence and counterevidence.

- Map only economically relevant findings into the model or decision record. Process-control modules such as multiples and relative valuation may have no direct valuation line; in that case document the downstream error or governance risk the control prevents.

## Metrics and calculation controls

| Metric / concept | Construction | Required validation |
| --- | --- | --- |
| EV/EBITDA | EV/EBITDA = enterprise value / normalized EBITDA | EV/EBITDA: Recalculate EV/EBITDA from cited inputs; reconcile definition, period, units, signs, and source version; investigate and document any variance before use. |
| EV/EBIT | EV/EBITDA = enterprise value / normalized EBITDA | EV/EBIT: Recalculate EV/EBIT from cited inputs; reconcile definition, period, units, signs, and source version; investigate and document any variance before use. |
| P/E | P/E = diluted equity value per share / normalized diluted EPS | P/E: Recalculate P/E from cited inputs; reconcile definition, period, units, signs, and source version; investigate and document any variance before use. |
| FCF yield | FCF yield = normalized free cash flow to equity / current equity value | FCF yield: Recalculate FCF yield from cited inputs; reconcile definition, period, units, signs, and source version; investigate and document any variance before use. |
| residual multiple after fundamentals | Peer valuation premium/discount remaining after adjusting for measured differences in growth, margins, ROIC, capital intensity, leverage, and risk. | residual multiple after fundamentals: Recalculate independently from cited source data; verify definition, period, units, scope, signs, and any reconciliation to reported financial or operating totals. |



## Relative valuation laboratory

- Choose multiples whose numerator and denominator refer to the same capital providers. Enterprise multiples pair EV with pre-interest operating metrics; equity multiples pair equity value with after-interest metrics.

- Normalize peer accounting before comparing multiples. Lease policy, SBC, capitalized R&D, acquisitive growth, pension accounting, fiscal dates, and cyclicality can make headline multiples non-comparable.

- Build a regression or matrix against growth, margin, ROIC, leverage, and durability only when sample size and economics justify it. Peer average is not intrinsic value.

## Worked application

> Case: same 20x EBITDA multiple means different value for capital-light and capital-heavy businesses.

- Reconstruct the relevant reported fact from primary evidence before interpreting the case. For multiples and relative valuation, show the raw components rather than only the resulting ratio or narrative.

- Build the causal chain through metric selection, normalization, fiscal alignment, growth, then identify which link is directly observed and which link remains an assumption.

- Calculate EV/EBITDA, EV/EBIT, P/E, FCF yield from sourced components under the reported/base interpretation and at least one skeptical alternative interpretation.

- Translate the difference between cases into the variable that matters for multiples and relative valuation: evidence quality, revenue, operating profit/NOPAT, free cash flow, invested capital, financing/dilution, risk, or valuation. Mark non-applicable links instead of inventing them.

- Expert consistency test: explain the premium or discount before calling a multiple cheap or expensive.

- Precommit the specific future filing, KPI, customer/supplier observation, regulator action, or market input that would materially invalidate the multiples and relative valuation conclusion.

## Failure tests

- FAIL if metric selection cannot be defined and reproduced from the source pack.

- FAIL if a peer multiple is applied before normalizing denominator definition, growth, margins, capital intensity, leverage, cycle, and accounting differences.

- FAIL if the multiples and relative valuation conclusion depends on an unstated assumption, unreconciled definition, or evidence that cannot be traced to its source/version.

- FAIL if evidence materially inconsistent with the multiples and relative valuation conclusion is omitted, reclassified, or dismissed without a documented definition, materiality, causal, timing, and source-quality analysis.

## Completion test

A senior reviewer must be able to reproduce the multiples and relative valuation conclusion, vary the most sensitive assumption independently, trace the change through the model, understand the strongest opposing case, and identify the next evidence that would force an update. If any link is missing, the module remains open.