Valuation

A multiple is an abbreviation of a discounted cash flow model. That sentence explains the order of this course and most of what goes wrong in the subject: the abbreviation is used for years before anyone reads the thing it abbreviates, so the assumptions travel around unexamined.

Nine lessons, in increasing distance from the cash.

The first is what is being priced, because the most common error here is confusing the price of a company's shares with the price of its business. Then four multiples, ordered by what they divide by: earnings, book value, sales, and then earnings before interest, tax, depreciation and amortisation, which is the one practitioners actually transact on. Each lesson says where its denominator is a choice rather than a fact, and every one of those denominators is a choice somewhere.

The sixth lesson is the payout ratio, because a multiple prices the earnings and the payout ratio decides how much of them ever leaves the company.

The last three are the reason this course exists. The seventh is the discounted cash flow model itself, and why most of its answer sits in a terminal assumption the forecast never discusses. The eighth is earnings power value, which asks what the business is worth if it never grows again and so deletes the assumption that does most of the damage. The ninth runs the model backwards: instead of forecasting and comparing with the price, solve for the operating performance the price already implies, then judge whether that is likely. It could not have been placed earlier, because reading expectations out of a price requires knowing the model whose inputs you are solving for.

No lesson here says what any company is worth, and none names a level at which a multiple becomes cheap. Those are not withheld. They do not exist as general facts, and every source that prints one has substituted a convention for an estimate.

Where this sits

Sixth of nine courses. It follows Cost of capital because a discounted cash flow model needs a discount rate, and a multiple is an abbreviation of that model. Everything before it describes a business. This course prices one. Value investing follows, and is about which of these instruments to reach for.