When performing a comparable company analysis, you find that the target company has significantly higher growth than its peers. How do you adjust the multiples?
A core Valuation interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.
THE SHORT ANSWER
You cannot simply use the median peer multiple. Instead, use a regression analysis to control for growth, or apply a PEG ratio (P/E to growth) if using P/E. Alternatively, use forward multiples that incorporate expected growth. Another approach is to use a sum-of-the-parts or DCF to value the growth separately. Simply applying the peer median multiple would undervalue the target if growth is higher.
WHAT INTERVIEWERS LISTEN FOR
- ✓Adjust for growth using PEG ratio or regression
- ✓Use forward multiples
- ✓Consider DCF for growth-dependent value
COMMON MISTAKES
- ✗Applying unadjusted median multiple
- ✗Ignoring growth differences
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