Chapter 8 of 10All chapters
Chapter 8 of 10
Valuation basics
Price against what you get.
Common measures
Price to earnings compares price with profit. Enterprise value to EBITDA accounts for debt. Price to book compares with balance sheet value, useful mainly for asset-heavy businesses.
- Every multiple is a shorthand for assumptions about growth and risk.
- A low multiple often reflects a real problem rather than an opportunity.
The underlying idea
A business is worth the cash it will produce, discounted for time and risk. All multiples are approximations to that, and knowing this stops them being treated as facts.