How to value a company using multiples - MoneyWeek Investment Tutorials

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Closed Caption:

yeah
yeah
yeah
so welcome back to my short series on
valuing companies short job not a degree
course and the next topic I want to take
on fits in to my introductory video
three ways to value a company and its
method number 2 i've already done one
video which is out there how to value a
company using the assets so let's go
straight in to the second of three
approaches outline in the introductory
video and that is evaluating company
using multiples ok if you seen the first
video and heard you to take a look at
three ways to find your company you'll
see that i mention now sits based
approach has won multiple ways to
approach that's now today and then
there's a full-blown DCF for discounted
cash flow and I'll deal with that in
another video
ok so in this shortstop series of
instructional videos what is the way you
go about valuing the company using
multiples quick-and-dirty this method
certainly not scientifically foolproof
but it's a useful check on whether your
other methods now sets DCF throwing out
sensible numbers to see it that way back
of an envelope check does this valuation
makes sense
who would use the method on that
describe while a predator may be looking
value a company for example somebody
who's looking to maybe list a private
company also private company worth is no
share price had way to start can use
this approach an investor just thinking
well this is the company i'm looking at
good value relative to other companies
can also use this approach has got a few
approaches there's a little bit quick
and dirty now arrest on a key point
which is if you're going to value
anything using multiple and this fast
approach you need to pick the right
multiple I mean by that well armed
basically what I'm suggesting is there
is a way of using ratios to get a quick
and dirty valuation of the company you
need to sort of choose the right one for
the company all sector ok and what I
mean by that is if you're choosing ratio
by the way to take a look at my the
ratios videos if you're unsure about
some of this stuff i mentioned at the
end all right you're lighting company
using multiple you've got
learnings based multiples like classic
example the old-fashioned de radio and
12 others out there too then you've got
sales-based multiples like the price to
sales ratio ok those people thinking
crises or this is a bit quick there are
videos out there or what is a p/e ratio
what is the price to sales ratio ok and
then you've got like also asset driven
multiples like the price-to-book ratio
right now the point is it's if you're
looking at company thinking what a dirty
quick-and-dirty check on valuation
robbing a private company i'm not sure
quite what compare it to you need to
compare it to something which is similar
to use decide what the Beast it is
you're trying to do this method on you
know is it a company that's driven by
earnings as a clue is in generating any
earnings because it isn't not much . and
evaluate using internet-based approach
there are companies that are loss-making
grabbing marketshare telecoms dot-coms
for example don't have earnings so you
can't use earnings based method of value
then you have to use like a sales-based
method we even sillier you know a sort
of price to click or a price two
eyeballs method or I believe some of
that . consilience behind for today so
you know is it a sales driven company IE
doesn't have any earnings is it
learnings driven we'll see what frankly
you you'd like to see in most cases or
is it a set driven is it the size of the
balance sheet that drive the industry
sector investment trust companies
property companies for example is that
the key driver because that's going to
influence how you go about what I'm
about to suggest necks so that's number
one pick the right multiple he's had
them done right but important now let's
assume you've decided you want to get
out and earnings base route so how do
you do it how does any of this stuff
give you evaluation for a company or a
quick-and-dirty check as to whether
companies cheaper expensive
well the answer to that question is you
can simply rearrange a p/e ratio or
prices sales ratio or a price-to-book
ratio to give you what you're looking
for me show you what I mean very end
simple maps in it if for example i was
to say to you a p/e ratio for particular
company is 5 i'm not sure about what I'm
talking about here to see my what is a
p/e ratio video first
ok and what you're trying to get out of
this exercise is the value of the
company the price because the p/e ratios
the price per share earnings per share
or the entire market capitalization 21
years earnings historic or forecasts and
you know the answers 5 ok you can
rearrange this by multiplying both sides
by E so the value of the company if you
like the price is equal to five times E
flat is multiply both sides by it
becomes this price is five times e made
my point
ok it's not the math that I'm worried
about too much I wasn't too bad
hopefully is this
let's say you have an earnings figure
the company's value ok you think are
realistic paintings figure is a hundred
million alright and what you've done is
you've got outlook for firms imagine
trying to do a private company using
private publicly quoted companies for
example to have share prices are
determined by the market you've decided
that comparable firms in the market have
let's say call those benchmark firms
other firms like this one typically have
a p/e ratio 540 i'm going with this so
you decided
similar terms of pho 52 this firm rival
estimate earnings hundred in year you
could on that basis say while the
expected price the value of this thing
is five times e which is five times a
hundred million so 500 minutes very
quick and dirty rights are saying this
company is worth really using a very
quick comparative man
look at other companies about 500
million right now would that be useful
to you can clearly see it's a very
simplified method normal actually owned
by a company on this basis hope they
wouldn't just use this one method they
do other things like asset-based
approach and in a previous video or the
DCF approach i mentioned in the future
one but to whom would this be useful
ok if anybody and the answer is well if
you're looking at companies already
listed as an investor and trying to get
comparisons cheap is expensive
you might say well similar companies
trying to be you five this one's got
reliable earnings of a hundred million a
year expected value 500 million if it's
actually valued at $MONEY only 300
million its market capitalization is
only 300 million you might say war
actually maybe it's a little bit cheaper
should be maybe the scope investigate
further it is the company i'm looking at
undervalued
ok so there's one will use of it
somebody trying to bring let's say a
private company to the market for the
first time if they can find comparable
companies and that's easier said than
done of course most direct to sale
company's unique the rest of it and find
comfortable companies they would say
well let's look at those comfortable
companies average that the ratio
multiply our company's earnings by that
and get a ballpark figure for this new
one to the markets worth that's pretty
quick and dirty approach
alright so the couple of so uses this
technique if you're in a negotiation to
buy a company
let's say unlike the situation for a lot
of y'know but you might use this is this
backup as i mentioned before you might
be some DCF which is pretty meeting you
might do some massive bass valuation you
might use this is the kind of
sensibleness check if you like it does
this answer come anywhere near the other
answers all right
celebrities very very fast introductory
video the multiple based approach to
valuing a firm deciding how much is
worth whether an existing firms cheap or
expensive right like all these methods
it's more art and science insofar as you
pick the right multiple alright is that
decision to make first of all you know
i'm looking at an earnings based on
sales based asset-based or what based on
a company that's fairly key and secondly
you've got to be comfortable your
benchmark right
OKC's had been done to just say well go
out and find a bunch of similar
companies aren't you
the benchmark but this one how many
there are and how similar they actually
are is a matter of judgment in practice
there is the second of three methods you
could use to go about putting some sort
of value on the company