Value investing · Course 32 of 39 · Valuing a business
Multiples, and why they mislead
Where a multiple comes from, what drives each one, how to build a peer set and average it right, and what the record says about multiples that stayed cheap.
A multiple is the shortest sentence in finance and the easiest to misread. It is not a valuation method of its own: it is a discounted cash flow with the assumptions hidden, and the whole skill is in getting them back out.
Seven lessons. The first derives a price to earnings ratio from a discounting identity, so the hidden assumptions become visible. The next two ask what actually moves each multiple and how a peer set decides the answer before any arithmetic happens. Then the averaging error that doubles a conclusion, what belongs in an enterprise value and what this product refuses to publish one for, the cycle sitting inside a low multiple, and finally what happens to companies that stayed cheap.
Every cohort figure comes from the product's own dated distributions, with the cohort size and the build date beside it. It assumes you have met the common ratios and can read an income statement.
The model, not your inputs
Multiples, and why they mislead is 7 lessons on how a valuation is built and which assumption it really turns on. Every input is still yours to supply, this course supplies none of them, and a model with no company in it produces no number you can act on.
Related
- What is a good P/E ratio? is the single-ratio version of this course's first question, with Graham's ceiling placed in today's market.
- What a DCF is really doing is the model a multiple compresses, spelled out at full length.
- Benchmarks publishes the dated distributions every cohort figure in this course is drawn from.
See our methodology for how the product reads a filing and what it refuses to compute.