Abstract

Market multiples are common and simplified tools used by the financial community for asset and company valuation, in which reference is made to previous transactions or “well-established” guideline companies in a particular industry. Though the simplicity of the method is indeed tempting, the inappropriate use of multiples may lead to erroneous reasoning and incorrect investment decisions, because there are a number of underlying assumptions comprising each valuation multiple. This article aims to analyze the accuracy of valuation multiples and to understand the financial drivers that explain the level of multiples. Using a sample of listed European firms, different financial ratios are analyzed, and the most appropriate drivers are selected. The article provides a few tips and hints to corporate executives and financial analysts in determining the factors to consider when using market multiples in their simplified analysis of investment opportunities.