Valuation Multiples Concept and Categories

Imagine you’re looking at houses. One is listed for 800,000. Which is the better deal? You can’t answer until you know how much house you’re getting — square footage, number of bedrooms, the neighbourhood. In finance, we use a similar shortcut. Instead of price per square foot, we look at price compared to earnings, sales, or cash flow. These are called valuation multiples. They let us compare companies of all sizes on a level playing field. In this chapter, we’ll learn what multiples are, how to pick the right one, and how to use them to estimate a company’s worth.