Key Features of Market-Based Valuation Multiples

Medium Equity Valuation Applications Market-based Valuation

In the context of market-based valuation for a publicly traded company, analysts often use valuation multiples derived from comparable companies to estimate the company's fair value. This method relies on identifying similar companies to form a peer group and applying the multiples of those peers to the company in question.

Consider the following valuation multiples: Price-to-Earnings (P/E) ratio, Enterprise Value-to-EBITDA (EV/EBITDA) ratio, and Price-to-Book (P/B) ratio.

Which of the following statements accurately reflects a key feature of these valuation multiples in assessing a company's value relative to its peers?

The P/E ratio is most appropriate for valuing companies with stable earnings, while the EV/EBITDA ratio is preferred for companies with fluctuating earnings.

The P/B ratio is predominantly used for valuing growth companies because it reflects future growth potential.

The EV/EBITDA ratio provides a more comprehensive view of a company's valuation by accounting for both equity and debt.

Hint

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