Five adjustments that move a multiple
| Adjustment | Direction | Example |
|---|---|---|
| Growth premium | Faster growers deserve higher multiples | 25% grower vs. 10% grower |
| Margin quality | Higher margins = more per dollar of revenue | 40% EBITDA margin vs. 15% |
| Capital intensity | Lower capex = more FCF per dollar of EBITDA | Asset-light vs. heavy capex |
| Cyclicality | More stable = higher multiple | Subscription vs. project-based |
| Geographic risk | Emerging market = discount | U.S. revenue vs. EM exposure |
Regressing multiples against growth rates
The most rigorous approach: regress multiples against growth rates across your peer group. The regression line shows what multiple a given growth rate ‘deserves.’ If a company trades below the line, it may be undervalued relative to peers.
Plot multiples against growth for peers
Compare 3 peers on the Screener. Plot their EV/EBITDA against revenue growth. Does the company with the highest growth rate also have the highest multiple? If not, investigate why.
Is a higher multiple actually expensive
Company A trades at 15x EV/EBITDA with 20% growth. Company B trades at 12x with 18% growth. Is A expensive?
A cheap multiple can signal real risk
When a premium multiple needs investigating
Company X trades at 15x EV/EBITDA. Peer A trades at 12x. Both have similar growth + margins. Is X expensive?
Check your understanding
Sit with the ideas.
Company A trades at 20x EV/EBITDA (peer median: 15x). Company A has 30% EBITDA margins (peers: 20%), 15% revenue growth (peers: 8%), and ROIC of 25% (peers: 12%). Is the premium justified?
Why: