Relative valuation
Valuation multiples
EV/EBITDA, EV/Sales and P/E — and why the numerator must match the denominator.
18 minintermediateMembers
Learning objectives
- Calculate EV/Sales, EV/EBITDA and P/E
- Match each multiple's numerator to the claim its denominator belongs to
- Explain why the median is used to summarise peer multiples
A multiple expresses value relative to an operating or earnings metric, so companies of different size can be compared. The golden rule is consistency: the numerator and denominator must belong to the same group of investors.
- Sales, EBITDA and EBIT are earned before interest — they belong to all capital providers, so they pair with enterprise value.
- Net income is what is left after interest — it belongs to shareholders, so it pairs with equity value. That is why P/E uses the share price (equity value per share) and EPS.
EV/Sales = EV ÷ Revenue EV/EBITDA = EV ÷ EBITDA P/E = Market cap ÷ Net income = Price ÷ EPS
- EV
- market cap + debt − cash (+ other claims)
- Market cap
- share price × diluted shares (equity value)
Included with a Formula Quest membership
The rest of this lesson is for members. Members get the full lesson, including its 3 graded exercises, and every other Finance Quest lesson.