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Strategic Performance Management and Business Valuation · Business Valuation Methods and Approaches

Market Approach and Relative Valuation Multiples Explained

Updated 11 October 2026 · Fact-checked

The market approach values a business by comparing it with similar listed companies or past deals. You pick comparable firms, compute a multiple such as P/E or EV/EBITDA, take a representative value, apply it to the target's matching metric, and convert enterprise value to equity value if needed.

Understand Market Approach and Relative Valuation Multiples

The market approach says a business is worth what the market pays for similar businesses. You do not forecast cash flows. You observe prices and scale them to the target.

A multiple is a price divided by a performance measure. P/E divides price by earnings. EV/EBITDA divides enterprise value by operating profit before depreciation. You compute the multiple for comparable firms, then apply it to the target's own figure.

There are two main sources of comparables. Comparable company analysis uses current trading prices of listed peers. It shows minority, marketable values. Precedent transactions use prices paid in past acquisitions. They usually include a control premium and synergies, so they tend to give higher values.

Match the multiple to the numerator. Equity multiples (P/E, P/B) give equity value directly. Enterprise multiples (EV/EBITDA, EV/Sales) give enterprise value. For these, subtract net debt (debt less cash) to reach equity value. Mixing the two is the most common error.

Choose the multiple that suits the business. P/E suits stable, profitable firms. EV/EBITDA suits firms with different debt levels or depreciation policies. P/B suits banks and asset-heavy firms. EV/Sales suits loss-making or early-stage firms. Use the median when peers include outliers, and adjust for size, growth, risk and one-off items.

Key rules to remember

Price-Earnings (P/E)
P/E = Market price per share ÷ EPS = Market capitalisation ÷ Net profit
Equity multiple. Target equity value = peer P/E × target net profit.
Enterprise Value
EV = Market capitalisation + Debt + Preference capital + Minority interest − Cash and cash equivalents
Net debt = Debt − Cash. Include items consistently with the peers.
EV/EBITDA
EV/EBITDA = EV ÷ EBITDA
Enterprise multiple. Target EV = peer multiple × target EBITDA.
Price-to-Book (P/B)
P/B = Market price per share ÷ Book value per share
Equity multiple. Common for banks and financial firms.
EV/Sales
EV/Sales = EV ÷ Revenue
Enterprise multiple. Used when earnings are negative or very low.
Equity value from EV
Equity value = EV − Net debt (− preference capital − minority interest)
Always do this step after using an enterprise multiple.
Value per share
Value per share = Equity value ÷ Number of shares
Use the shares outstanding for the target.

How to solve Market Approach and Relative Valuation Multiples questions

Use this sequence for any market approach question, whether it gives peer data or deal data.

  1. 1Identify the target and the metric available (net profit, EBITDA, book value or sales). Note the purpose and whether control is involved.
  2. 2Select suitable comparables and drop or flag outliers or non-comparable firms.
  3. 3Compute the multiple for each comparable. Use the same basis (same year, same definition of earnings or EBITDA).
  4. 4Choose a representative multiple: average or median, or a range. Say why.
  5. 5Adjust for differences if the question gives them, such as size, growth or non-recurring items, or a control premium or marketability discount.
  6. 6Apply the multiple to the target's matching metric. Equity multiple gives equity value. Enterprise multiple gives EV.
  7. 7For EV, subtract net debt and other claims to get equity value, then divide by shares for value per share.
  8. 8State the value or range, and comment on limitations and reliability.

Quickest way: Match, multiply, bridge

When to use it: Use when the question gives peer multiples or peer data and asks for a quick value of the target.

  1. Check the multiple type: equity (P/E, P/B) or enterprise (EV/EBITDA, EV/Sales).
  2. Multiply the chosen multiple by the target's same metric.
  3. If the result is EV, subtract net debt and other claims.
  4. Divide by shares if the question asks for price per share.
  5. Write one line on why that multiple and peer set were chosen.

Common mistakes in Market Approach and Relative Valuation Multiples

  • Applying an EV multiple and reporting the result as equity value

    Students stop after multiplying and forget the bridge.

    Fix: Whenever the multiple has EV in it, subtract net debt (and preference capital, minority interest) before stating equity value.

  • Using a P/E multiple on EBITDA, or EV/EBITDA on net profit

    Multiples are memorised without their numerators and denominators.

    Fix: Write the multiple as a fraction first and apply it to the same denominator for the target.

  • Including cash on the wrong side of the EV calculation

    Students add cash instead of deducting it when building EV from market cap.

    Fix: EV = market cap + debt − cash. When going back to equity, EV − debt + cash.

  • Treating precedent transaction multiples as equal to trading multiples

    Both are called market approach, so the control premium is overlooked.

    Fix: State that transaction multiples usually include control premium and synergies, while trading multiples reflect minority positions.

  • Using the mean when one peer is an extreme outlier

    Averaging is the default habit.

    Fix: Exclude or flag the outlier, or use the median, and explain the choice.

  • Using P/E for a loss-making target

    P/E is the most familiar multiple.

    Fix: Negative earnings make P/E meaningless. Switch to EV/Sales or EV/EBITDA if EBITDA is positive, and say why.

Worked examples

Example 1

Alpha Textiles Ltd has net profit of ₹12 crore and 4 crore shares. Three comparable listed firms have P/E ratios of 14, 16 and 18. Value Alpha's equity and per-share price using the average P/E.

Show the solution
  1. Average P/E = (14 + 16 + 18) ÷ 3 = 48 ÷ 3 = 16.
  2. P/E is an equity multiple, so apply it to net profit directly.
  3. Equity value = 16 × ₹12 crore = ₹192 crore.
  4. Value per share = ₹192 crore ÷ 4 crore shares = ₹48.

Answer: Equity value is ₹192 crore, or ₹48 per share.

Example 2

Beta Engineering Ltd has EBITDA of ₹50 crore, debt of ₹120 crore, cash of ₹20 crore and 5 crore shares. Peer companies trade at EV/EBITDA of 8, 9 and 10. Using the median multiple, estimate the equity value per share.

Show the solution
  1. Median of 8, 9, 10 = 9.
  2. EV = 9 × ₹50 crore = ₹450 crore.
  3. Net debt = ₹120 crore − ₹20 crore = ₹100 crore.
  4. Equity value = ₹450 crore − ₹100 crore = ₹350 crore.
  5. Value per share = ₹350 crore ÷ 5 crore shares = ₹70.

Answer: Equity value is ₹350 crore, or ₹70 per share.

Exam tips

  • In MCQs, first look at the multiple's name. If EV is in it, expect a net debt step before the answer.
  • In written answers, always justify the choice of multiple and comparables. Marks are given for reasoning, not just arithmetic.
  • When asked to compare comparable company analysis with precedent transactions, cover control premium, data source, timing and synergies.
  • Show the EV to equity bridge as separate lines so partial marks are safe if an earlier number is wrong.
  • Add a short limitations note: peers are never identical, markets can misprice, and accounting policies differ.

Practice questions from Business Valuation Methods and Approaches

Market Approach and Relative Valuation Multiples in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Market Approach and Relative Valuation Multiples: frequently asked questions

What is the difference between comparable company analysis and precedent transactions?

Comparable company analysis uses the current trading multiples of listed peers and reflects minority, marketable values. Precedent transactions use multiples from past acquisitions and usually include a control premium and expected synergies. So transaction multiples are often higher.

When should I use EV/EBITDA instead of P/E?

Use EV/EBITDA when peers have different debt levels, tax rates or depreciation policies, since it is measured before interest, tax and depreciation. P/E works best for stable, profitable firms with similar capital structures.

Why do I subtract net debt after using EV/EBITDA?

Enterprise value is the value of the whole business to all capital providers. Shareholders own only what remains after debt is paid and cash is counted. So equity value equals EV less net debt and other claims.

Which multiple suits banks?

P/B is commonly used for banks and financial firms because their assets and liabilities are largely financial and book value is a meaningful base. EV-based multiples are less suitable since debt is part of their operations.