How is DCF different from relative or multiples valuation? Why does Trefis do only DCF valuation?
Relative or multiples based valuation involves applying a multiple to a company metric such as next year’s forecasted Revenue, EBITDA or EPS to determine its enterprise value. For example, in multiples analysis, a company that is expected to have a 2009 EV/Revenue multiple of 1.5x and 2009 full year Revenue of $1 billion is expected to have an enterprise value (EV) of $1.5 billion (1.5 x $1 billion). One can carry out similar multiples based analysis using an EBITDA multiple (EV/EBITDA) or EPS multiple (P/E). The challenge, however, is in selecting the appropriate multiple to apply and this is why multiples analysis is also referred to as ‘relative’ valuation since the prevalent method is to look at the multiples of competitors or comparables. If you’re trying to figure out what EV/Revenue multiple is appropriate for Coca-Cola, you would look at Pepsi’s EV/Revenue multiple. Therefore your valuation is typically relative to the valuations of its competitors or comparables. However, what
