Interview Question, Multiples vs DCF
What's the best answer to the following interview question?
If you have a company with really high multiples, do you value it in a deal using comparable comps or DCF?
I’d lean towards DCF here. If your company has high multiples, you’re implying that your current valuation (TEV/EV) over whatever financial metric (Sales/EBITDA/EBITDAR/etc) is higher than its peers.
In cases like these, the company is typically valued at a higher multiple because it’s growing significantly quicker than its peers, it’s got a first movers advantage, or it’s got some tangible (rights to drill somewhere that happens to be an oil mine)/intangible (trademark/IP) advantage over its peers.
By using trading comps analysis, you’re basically negating that advantage that investors are pricing in.
Hope that helps.
It depends like the above said. They just want to see you've thought through the options.
Remember DCF terminal value can be done by multiple too, which could be influenced.
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