What is a company you’re looking to acquire actually worth? Would you be paying too much, or could you be getting a great deal?
Figuring out whether a company is worth the asking price isn’t always straightforward. Many investors struggle to make sense of financial ratios, making it easy to overpay or miss a solid opportunity. Without a clear framework for comparing businesses, valuations can feel uncertain or be inaccurate.
Market multiples (also known as industry multiples) help make sense of valuations by providing a way to measure a company’s value against its industry peers.
Simple ratios like Price-to-Earnings (P/E), Price-to-Sales (P/S), and Enterprise Value-to-EBITDA (EV/EBITDA) offer a quick benchmark for assessing financial performance.
But knowing how to interpret these numbers makes it easier to identify whether a company you have your eye on is undervalued, fairly priced, or overpriced.
Let’s break down the basics and show how market multiples can help you assess value, avoid overpaying, and spot the best investment opportunities.
Using Market Multiples to Determine Company Value
Market multiples are essential tools for anyone looking to acquire or invest in a business. They help you quickly gauge if a company is priced right compared to others in the market.
These multiples give you a straightforward way to spot if a business is overvalued or undervalued and whether it’s a good investment opportunity.
Instead of relying on guesswork, the market multiples method looks at financial figures like revenue, profit, or cash flow and applies a standard multiple based on how similar businesses are valued.
How Market Multiples Work
The market multiples method is relatively straightforward. Businesses in the same industry with similar financial performance tend to have similar valuations. To estimate a company’s value, you take a key financial metric, like earnings or revenue, and apply a multiple based on what comparable businesses are selling for.
As an example, if businesses in a particular industry are typically valued at five times (5x) their EBITDA (earnings before interest, taxes, depreciation, and amortisation), then a business generating $2 million in EBITDA would be valued at about $10 million by applying that multiple.
Here is a summary of typical EBITDA multiples across various Australian industries:
| Industry | EBITDA Multiple Range | Detail |
| Financial Services | 4× to 6× | Influenced by earnings diversity, asset requirements, and market operations. |
| Education | 3× to 6× | Depends on service type, course offerings, content quality, and student demographics. |
| Transport & Logistics | 3× to 6× | Factors include cargo volume, specialisation, geographic reach, trade routes, and automation levels. |
| eCommerce & IT | 4× to 8× | Valuations vary based on business model, client base strength, scalability, market reach, and technological evolution. |
| Healthcare | 4× to 8× | Influenced by national presence, technology use, exclusive product distribution, government contracts, scalability, and growth prospects. |
These multiples provide a general framework for valuation. However, individual business characteristics and market conditions can significantly impact actual valuations. For a more precise assessment, we recommend consulting with a professional advisor like our experts at Growth iQ.
But here’s the catch: a single number doesn’t tell the full story.
Before relying on market multiples, it’s important to understand what they actually tell you.
The Price-to-Earnings (P/E) ratio, for example, measures how much buyers are willing to pay for every dollar of earnings. A high P/E ratio usually means you can expect strong future growth, which is common in fast-growing industries.
A low P/E ratio might suggest the business is undervalued or facing challenges like declining revenue or increased competition.
These numbers are only useful when compared to businesses in the same industry. Looking at market multiples in isolation won’t tell you the full story, but they can help you spot trends and identify whether a business is priced fairly.
What Affects a Company’s Valuation?
A business’s value isn’t just about how much money it makes. Several factors can influence its worth, and understanding these factors can help you decide if a business is a good investment opportunity.
Market Conditions
The overall economy plays a big role in valuations. When interest rates are low and consumer confidence is high, business valuations tend to increase.
On the other hand, during economic downturns, valuations often drop as investors become more cautious. For example, the S&P 500 saw an average 18% drop in valuations during recessions over the past 50 years.
Industry Growth Potential
Some industries naturally attract higher valuations. Technology, renewable energy, and healthcare are examples of sectors where businesses often trade at higher multiples because investors expect strong future growth. The renewable energy market, for instance, is projected to grow by over 8% per year, making companies in this sector more attractive to investors.
Financial Performance
Businesses that show steady revenue growth, strong profit margins, and reliable cash flow usually attract higher valuations. For example, companies with profit margins above 10% tend to trade at significantly higher earnings multiples than those with thinner margins. Investors look at these numbers to see how well the company is run and whether it has the potential for future success.
Competitive Position
A company’s market share, brand recognition, and ability to stand out from competitors can also impact its valuation. A well-established business with a loyal customer base and a strong reputation will often be valued higher than a smaller competitor struggling to gain traction. Businesses with strong brand recognition can command up to 20% higher valuations than lesser-known competitors.
By understanding these factors, investors can get a clearer picture of what a company is truly worth before making an investment.
How to Use Industry Multiples to Shape Your Investment Strategy
Market multiples are not only essential for valuing companies, they are also a valuable tool for guiding investment decisions. By comparing a company’s multiples to industry benchmarks, investors can make more informed decisions about which businesses are poised for growth, which may be undervalued, and how to time investments effectively.
How Investors Can Leverage Industry Multiples:
Benchmarking for Investment Opportunities: By comparing a company’s multiples to industry averages, investors can quickly assess whether the company is undervalued or overvalued. If a company’s multiples are lower, it may present an opportunity for growth, making it a potential investment target. Conversely, higher multiples could indicate that investors are already anticipating strong future growth, signalling confidence in the company’s potential.
Guiding Investment Decisions: Investors can use industry multiples to inform key decisions, such as whether to increase or decrease their stake in a business. If a company’s valuation is lagging behind competitors, it may be an indicator that adjustments are needed in pricing or operations, creating an opportunity to step in with strategic support or advice.
Mergers & Acquisitions (M&A): When considering mergers or acquisitions, market multiples help investors establish the fair value of a business. This reduces the risk of overpaying for an acquisition or underselling a business, allowing investors to negotiate better terms and avoid costly mistakes.
Forecasting Future Growth: Multiples also serve as a valuable tool for predicting a company’s future value. For industries with high growth potential, positioning investments strategically can result in significant returns as the company’s valuation increases over time.
By incorporating industry multiples into your investment strategy, you can better navigate the complexities of valuation, forecast future business
Key Market Multiples Explained
Now, let’s dive into some of the most commonly used market multiples that help investors assess a company’s value:
- P/E Ratio: This compares the stock price to earnings per share. A high ratio suggests growth expectations, while a low ratio may signal undervaluation.
- P/S Ratio: This compares a company’s market value to its annual revenue. It’s especially useful for companies that are still in a high-growth phase, like startups, which may not yet be profitable.
- EV/EBITDA: This compares a company’s enterprise value to earnings before interest, taxes, depreciation, and amortisation. It shows if a company’s stock price aligns with its earnings potential.
- P/B Ratio: This compares a company’s market value to its book value. A ratio under 1.0 may indicate undervaluation, but it could also point to financial issues.
Market Multiples Are Just One Piece of the Puzzle
While market multiples provide a quick way to estimate a business’s value, they should never be used in isolation. A proper valuation takes into account industry trends, financial performance, and broader market conditions. Without considering these factors, you could end up overpaying or undervaluing a business.
If you want a clear, accurate understanding of what a business is really worth, Growth iQ can help. Our team will provide you with the insights needed to assess investment opportunities with confidence. Whether you are looking to buy, sell, or understand your company’s position in the market, we provide expert analysis tailored to your industry. Get in touch with Growth iQ today to make informed decisions backed by real data and strategic insights.