Valuation Fundamentals - What exactly is a valuation multiple?

A valuation multiple is simply a means of expressing a firm’s market value relative to one or more key financial metrics that presumably relate to that value. It can also be called a valuation ratio, since a ratio is another way of expressing a multiple.

For example, if a company with $1 million in revenues is priced at $3 million, the relationship of transaction price to company revenues can be expressed as 3:1 or as three times revenues. Other ratios might focus on earnings, cash flow, book value, or some other measure.

Most of the ratios used in the U.S. feature metrics such as earnings recognized under as generally accepted accounting principles (GAAP), but some popular measures are non-GAAP, such as earnings before interest and taxes (EBIT) or earnings before interest, taxes, depreciation, and amortization (EBITDA).

Some industries tend to focus on sales, others on earnings, yet others on particular assets.  In each case, multiples can provide a helpful starting point for analysis. In real-world terms, it becomes clearer why the appraiser or investment professional must choose the appropriate sample set and still leave at least some room for interpretation.