Relative valuation
Cross-checking a DCF with multiples
Turn a DCF's answer into the multiples it implies, and judge whether the market would recognise them.
Learning objectives
- Calculate the EV/EBITDA and P/E multiples a DCF value implies
- Calculate the exit multiple implied by a Gordon-growth terminal value
- Compare implied multiples with peers and judge whether the DCF assumptions are reasonable
A DCF turns a long list of assumptions — growth, margins, reinvestment, WACC, terminal growth — into one number. That number is hard to sanity-check on its own: is it a lot or a little for this business? Converting the DCF value into multiples puts it in the language the market uses, so you can compare it with what similar companies actually trade at.
The cross-check works in both directions. The trading-comps lesson valued Rawdah from peer multiples; here you start from a DCF and ask which multiples it implies. If they are far from the peer range, either the business genuinely differs from its peers or an assumption needs a second look.
Implied EV/EBITDA = DCF enterprise value ÷ EBITDA (LTM or next year — match the peers) Implied P/E = (DCF EV − net debt) ÷ net income Implied terminal multiple = undiscounted terminal value ÷ final-year EBITDA Terminal share of EV = PV of terminal value ÷ EV
- LTM
- last twelve months: the latest reported year
- NTM
- next twelve months: the first forecast year
- Terminal value
- the value at the end of the final forecast year, before discounting
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