Business Evaluation Based on Three KPIs
Business valuation is a complex and multi-layered process that involves the analysis of many factors. One of the most common methods of business valuation is the comparative transactions method (CTM).
Three key indicators are used to evaluate a business using the comparative transactions method:
Revenue.
EBITDA (Earnings Before Interest, Taxes, Depreciation, Amortization).
Multiples such as P/E (Price to Earnings), EV/EBITDA (Enterprise Value / EBITDA) and others.
Now let's look at how these metrics work and how to use them to evaluate a business.
Business Evaluation Based on the Three KPI Rule
Revenue
Revenue is the total income earned by a company in a given period. It reflects sales volumes and operating income. In the context of business valuation, revenue is an indicator of the size and scale of the company. High revenue indicates a large volume of operations and growth potential.EBITDA (Earnings Before Interest, Taxes, Depreciation, Amortization)
EBITDA is an operating profit indicator that shows net profit before interest, taxes, depreciation, and premium depreciation. This indicator reflects the real economic efficiency of a business, excluding the impact of financial position and depreciation of assets. A high EBITDA level indicates high profitability and sustainability of the business.Animators
Multiples are ratios used to calculate the value of a business based on its revenue or profit. Common multiples include:
P/E (Price to Earnings)
the ratio between the share price and the net profit per share.
EV/EBITDA (Enterprise Value / EBITDA)
the ratio between the value of a company and its EBITDA.
These multiples help to evaluate the value of a business relative to its financial performance and compare it with its peers on the market.
Stages of business valuation
Data collection: Data on recent transactions involving similar companies is collected.
Selection of analogues: Companies similar in size, structure and area of activity are selected.
Data adjustment: Data adjustments are made to take into account differences between analogues and the company being assessed.
Cost calculation: Based on the adjusted data, the final cost of the business is calculated.
The comparative transactions method is an important tool for business valuation. It helps to focus on real market data and take into account the specifics of a particular company. The correct application of this method requires a comprehensive approach, including data collection, selection of analogs, data adjustments, and cost calculation. Although the method has its limitations, it remains a key element in the arsenal of business valuation methods.
