Company valuation methods—relative valuation models

Relative valuation models use the market prices of comparable assets as a basis for pricing. The fundamental investment logic is to identify comparables and estimate value by comparing price/value ratios to key underlying drivers. Relative valuation models fall into two broad categories: (1) equity-value-based models—including P/E, P/B, and P/S; and (2) enterprise-value-based models—including EV/EBITDA, EV/OpFCF, and EV/Sales. This article focuses primarily on equity-value-based models. I. Price-to-Earnings (P/E) Model 1. Basic Concept The price-to-earnings ratio is the ratio of share price to earnings per share (EPS). \frac{P}{E} = \frac{Price}{EPS} \qquad (1) The valuation formula using the P/E ratio is: Estimated value per share of the target company = Comparable company or industry-average P/E ratio × Target company’s EPS 2. Model Rationale Why can the average P/E ratio serve as a multiplier for estimating share price? What are the fundamental determinants of P/E levels? According to the Dividend Discount Model (DDM), when a firm operates continuously and pays dividends growing at a stable rate, the per-share equity value is: Price = \frac{D_{1}}{K_{e}-g_{1}} \qquad (2) where D₁ denotes next period’s dividend per share, Kₑ is the cost of equity capital, and g₁ is the dividend growth rate. Dividing both sides of Equation (2) by EPS yields: \frac{Price_{0}}{EPS_{0}} = \frac{\frac{D_{1}}{K_{e}-g_{1}}}{EPS_{0}} = \frac{D_{1}/EPS_{0}}{K_{e}-g_{1}} \qquad (3) Next period’s dividend per share can also be expressed as: D_{1} = EPS_{0} \times (1 + \text{growth rate}) \times \text{dividend payout ratio} = EPS_{0} \times (1 + g_{2}) \times DPR \qquad (4) where g₂ is the net profit growth rate and DPR is the dividend payout ratio. Substituting Equation (4) into Equation (3) gives: \frac{Price_{0}}{EPS_{0}} = \frac{(EPS_{0} \times (1 + g_{2}) \times DPR)/EPS_{0}}{K_{e} - g_{1}} = \frac{DPR \times (1 + g_{2})}{K_{e} - g_{1}} \qquad (5) Expressed in Chinese, this reads: P/E Ratio = \frac{\text{Dividend Payout Ratio} \times (1 + \text{Net Profit Growth Rate})}{\text{Cost of Equity} - \text{Dividend Growth Rate}} 3. Key Drivers Key drivers include the firm’s growth potential, dividend payout ratio, and risk (as reflected in the cost of equity). Among these, growth potential is the most critical factor.

Types of value multiples and their applicable circumstances

1. Storage capacity multiple = (Equity value + Debt value) / Warehouse storage volume 2. Handling/throughput multiple = (Equity value + Debt value) / Handling volume or throughput volume 3. Professional staff multiple = (Equity value + Debt value) / Number of professional staff 4. Mine reserve multiple = (Equity value + Debt value) / Mine’s extractable reserves Among these four types of value multiples, profit-based and asset-based multiples are most commonly used, whereas specialized multiples are applied more selectively—primarily in valuing firms within niche industries. Selection of any such multiple should be guided by industry-specific characteristics and data availability, to ensure both comparability and methodological rigor of the valuation conclusion. II. Applicability of Value Multiples 1. For high-tech enterprises with relatively stable profitability—or firms with limited tangible assets but substantial intangible assets—a profit-based multiple is appropriate. Specifically, the P/E ratio suits companies with consistent profitability. 2. For service-oriented firms with low cost-of-sales ratios—or traditional-sector firms whose cost-of-sales ratios are relatively uniform across peers—an income-based multiple is suitable. 3. For loss-making firms possessing significant asset bases, an asset-based multiple is preferable. In particular, the P/B (price-to-book) ratio applies well to firms with large asset bases and positive book equity. 4. Industry-specific multiples vary markedly across sectors, yet they share several common features: the numerator typically uses enterprise value (EV), while the denominator selects a physical metric reflecting the sector’s core operational capability—for example: electricity generation volume in the power sector; number of billable subscribers in telecom and broadcasting; active user count or click-through volume for internet platforms; number of outlets or gross leasable area in retail; office floor area or hotel room count in real estate; and resource reserves or proven reserves in mining. (III) Key Considerations in Selecting Value Multiples Beyond the above industry-specific factors, selection of value multiples must also incorporate analysis tailored to the industry’s structural features and operating cycle. 1. Cyclical Industries For highly cyclical industries—such as aviation, natural resources, and steel—profitability fluctuates sharply. If the industry is undergoing pronounced cyclical swings around the valuation date, profit-based multiples (e.g., P/E, EV/EBITDA) may become severely distorted due to short-term earnings volatility. In such cases, practitioners often prefer more stable alternatives—such as asset-based multiples (e.g., P/B) or revenue-based multiples (e.g., P/S)—because their denominators (book equity, revenue) are comparatively less sensitive to cyclical fluctuations. Nevertheless, final selection must still reflect both industry traits and the specific asset composition of the subject firm. It should be noted that if industry cycles can be forecast with reasonable accuracy, techniques such as cyclical weighting or cyclical smoothing may be applied to adjust P/E, EV/EBITDA, and other profit-based multiples—thereby restoring their validity and enhancing alignment between the valuation outcome and the firm’s intrinsic value.

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Balchem Corp (BX:BL9B) displays enterprise value to EBIT forward metrics on the BX Swiss exchange. Trading was closed at publication with no recorded trades.

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