I would be really grateful if someone could explain this to me in detail. Im trying to calculate sales/EBITDA/PAT multiples for a bunch of Venture Capital funded Early Stage Companies. Most of these young companies have very low or negative earnings, so it makes sense to say that the P/E is Not Meaningful in such cases. And some even have very low sales too, which makes even the revenue multiple meaningless But I want to know exactly after which level does the multiple(sales/ebidta,pat) become meaning less? Is there a benchmark for it? i mean if the sales multiple is 200x to equity value. Than its obvious that the multiple is not usefull. Im analysing close to 800 companies and the multiples for these companies have varying ranges. For example the revenue multiple ranges from 4x - 350x. And I want to quicky write off the multiples which are meaning less as “meaningless”. So what range should i use for each of the 3 multiples to define “meaningfullness”? Thanks In Advance
First, what criteria are you using? This could be part of the problem. 800 companies is pretty substantial. You might want to narrow down your criteria. I work in IB so I deal with stuff like this on a reoccuring basis.
Geographic Region - What region do you want to focus on and what region(s) are pulling in your criteria?
Transactions - Have you considered pulling transaction data?
Size - What size range are you focusing your search? Make sure you are only pulling the stage you want to observe.
Industry - What industry are you attempting to value and is the industry reflected in your criteria? Not all early stage or seed companies will possess the same multiples. Different industries command different multiples.
Benchmark - Do you have a subject company and what are you using as a benchmark?
Analysis - Calculate the mean, median, standard deviation, high, low, etc. Sometimes when we have limited data or a lot of outliers we tend to use the median. Obviously, there’s a combination of science and art involved so you need to evaluate the data set and make the appropriate judgment.
There’s a few things to get started. If you could provide some more context to your situation, I could probably provide more insight.