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What are appropriate multiples to use when comparing two companies with different capital structures and varying...

What are appropriate multiples to use when comparing two companies with different capital structures and varying levels of capital expenditures? Which are not?

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Answer #1

When we are comparing two companies with different capital structures and varying levels of capital expenditures then the appropriate multiples are: enterprise value to sales ratio, enterprise value to EBIT, Price earnings ratio and price to sales ratio. These are appropriate multiples as they do not have any term that deals with capital structure components like debt, equity etc.

The multiples that deal with historical profits and sunk costs should be avoided as multiples in comparison.

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