Enterprise versus Equity Multiples

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There are two basic types of multiple that an investor has at his disposal – enterprise and equity multiples.

Definitions

From the UBS Warburg report:

Enterprise multiples express the value of an entire enterprise. That is the value of all claims on a business – relative to a statistic that relates to the entire enterprise, such as sales or EBIT.

Equity multiples, express the value of shareholders’ claims on the assets and cash flow of the business. An equity multiple therefore expresses the value of this claim relative to a statistic that applies to shareholders only. This includes earnings (after payments to creditors, minority shareholders and other non-equity claimants).

The concept is important here, because it tells us why a multiple like Enterprise value/Net Income does not make sense. Net income is the shareholders claim of earnings, but enterprise value is the value of all claims on a business.

Enterprise versus Equity Multiples

Equity multiples vs enterprise multiples

Most Common Uses

Enterprise multiples: EV/EBITDA, EV/EBIT, EV/NOPAT, EV/IC

Equity multiples: P/E, P/B, PE to earnings growth

Final Words

Based on the pros and cons of enterprise versus equity multiples, investors should be more equipped in picking the right choice for their investment analysis. Happy investing!

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Tee Leng is the co-founder and co-editor of ValueEdge. His investment articles have been published on ValueWalk, NextInsights and TheFinance.sg. Tee Leng is also the investment director of TwinPeak Capital, a private family office with 7 figures under advisement. Additionally, Tee Leng is the Director of NCK Global Capital and is a frequent guest speaker at institutions such as University College London (UCL) and at investment seminars held in Singapore.

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