Compare with similar companies

How it works

1. Pick companies like the one you are valuing: the same kind of customers and roughly the same growth and margins.
2. Work out their multiple, such as EV/EBIT: enterprise value divided by operating profit.
3. Apply the range to your company's operating profit. That gives an enterprise value.
4. Take off the net debt, and what is left is the value of the shares. Divide by the number of shares.

EV/EBIT is often used instead of P/E when companies carry different amounts of debt, because the debt is part of enterprise value. How enterprise value is worked out is in lesson 1, and P/E in the lesson on P/E ratios. A company with a loss has no meaningful EV/EBIT, and then the P/S ratio is often compared instead.

Real companies in one sector

Here are P/E and EV/EBIT for the technology companies among the largest in the US:

Even within one sector the numbers differ a lot. Palantir is at 272.4 and Oracle at 21.7. The companies sell different things, grow at different speeds and earn different margins. A gap in multiples is therefore no mistake in the market waiting to be corrected. It can just as well mean the market expects a different future for each, which is why the comparison needs companies that really are alike. Lesson 4 works out how much growth means for the number.

Try it

A made-up company has an operating profit of $500 million and net debt of $1 billion. Similar companies trade at an EV/EBIT between 12 and 18. Change the numbers:

A multiple 50% higher makes the shares 60% more valuable. The debt stays the same however highly the company is valued, so the whole difference goes to the shareholders. With a lot of debt the value of the shares moves more than the enterprise value, both ways.