Question

Using market multiples to calculate a company’s value is a simple methodology, in that value is determined by taking a summary performance measure and multiplying by a market multiple. List the five steps an analyst would follow in estimating value using a market multiple.

Answer 1

Five steps will be followed by the analyst in order to value the company through market multiple-

A. Firstly the analyst will calculate the company specific performance measure like he will compare the Earning per share while calculation of intrinsic value of the company.

B. Then he will try to find out multiple of related industry like he will find out the price to earning ratio of the related industry.

C. He will then adjust the market multiple in relation to the individual performance ratio like he will multiply the price to earning ratio in respect to the Earning per share.

D. He will then try to find out the valuation of the company as per the standard of the market.

E. He will invest accordingly after determination of undervaluation and overvaluation of the company after comparing with the current market price