Transaction Multiple

Transaction Multiple

Financial market participants continually conduct qualitative and quantitative research, among other things to calculate the fair value and future expected value of securities, to assess a company’s corporate solvency, liquidity and leverage, to forecast future earnings and to come up with valuations in merger and acquisition scenarios. A key metric to do all of those things and to conduct comparative analysis is the use of multiples. Analysts use hundreds of multiples to compare and contrast companies and securities across a number of dimensions. In equity investing, for example, a core metric is the P/E ratio. This shows the multiple of the share price to earnings per share. Leaving aside other factors, comparing the P/E multiples of companies in a peer group offers insight into companies that are undervalued, fairly valued and overvalued. Transaction multiples simply divide one number by another. An important number in the case of takeovers is enterprise value as a multiple of earnings. This is simply derived by dividing enterprise value by profits.

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