Valuation using multiples

In economics, valuation using multiples, or "relative valuation", is a process that consists of:

• identifying comparable assets (the peer group) and obtaining market values for these assets.
• converting these market values into standardized values relative to a key statistic, since the absolute prices cannot be compared. This process of standardizing creates valuation multiples.
• applying the valuation multiple to the key statistic of the asset being valued, controlling for any differences between asset and the peer group that might affect the multiple.

Multiples analysis is one of the oldest methods of analysis. It was well understood in the 1800s and widely used by U.S. courts during the 20th century, although it has recently declined as Discounted Cash Flow and more direct market-based methods have become more popular. "Comparable company analysis", closely related, was introduced by economists at Harvard Business School in the 1930s.