Cash Multiple
What is the correct way to calculate a cash multiple?
Let's use an extreme cash to illustrate my point.
I buy a property for $10. Then cash flows are as follows:
Year 1: -$1,000
Year 2: $2,000
Year 3: -$4,000
Year 4 (Sale Year): $8,000
I have seen formulas that only treat purchase price as "invested" equity. So the cash multiple would be $5,000 / $10 or 500x.
But doesn't negative property cash flow count as "invested" equity, after all, someone has to pay for shortfall.
I have seen formulas sum all negative cash flow as "invested" equity and positive cash flow as the numerator. So the cash multiple be ($10,000) / $5,010, about a 2x cash multiple.
Just using extreme case to demonstrate. What is the correct way? The more I think the more I get confused.
It's your peak equity in the deal - the maximum amount you have invested at any one moment. Take your first period cash flow, then add all of your cash flow in each period of your hold, and the maximum negative amount is your peak equity.
Never seen this concept before. So in your case, would the cash multiple be sum of all cash flows / peak equity invested. I.E. $4,990 / $3,010. So 1.65x multiple?
Any more opinions?
As @Pinkpoloshorts" said, the denominator in your multiple calculation is the Peak Equity in the deal.
Cash Multiple Formula = (Profit / Peak Equity) + 1 OR = (Total Cash Distributions / Peak Equity)
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