Learning objectives
By the end you can:
- Decompress any standard multiple into its drivers: derive and use justified
P/E = payout × (1+g)/(r−g),P/B = (ROE−g)/(r−g),EV/EBITDA = (1−d)(1−t)(1−g/ROIC)/(WACC−g),EV/Sales = EBIT margin × (1−t)(1−g/ROIC)/(WACC−g),EV/IC = (ROIC−g)/(WACC−g), andP/FCFE = 1/(r−g), and state, for each multiple, the companion fundamental without which quoting it is meaningless. - Enforce the consistency grammar: pair equity multiples with equity (post-interest) numbers and enterprise multiples with all-capital (pre-interest) numbers; build EV correctly (market cap + debt + leases + minority interest + preferred − cash); spot and fix the EV/EPS and P/Sales sins in any table.
- Choose true comparables by business model, not sector code, and normalize accounting before comparing: leases across ASC 842 / IFRS 16 / Ind AS 116, stock-based compensation, capitalized R&D/development, and one-offs, with the direction of each distortion memorized.
- Aggregate a comp set defensibly: median and harmonic mean over arithmetic mean, outlier and loss-maker handling with the selection bias named, forward versus trailing chosen deliberately and never mixed.
- Run a regression of multiples on fundamentals: fit the sector line (e.g., P/B against ROE for banks) by hand, price a firm off the line, and interpret the residual as a question rather than an answer.
- Read precedent transactions and control premia: explain what a control premium pays for, where deal multiples come from (merger proxies, SEBI letters of offer), why they sit above trading multiples, and when applying them is a category error.
- Apply India's premium-multiple discipline: explain the quality-scarcity / float / flows regime, prove with two-stage math what a 60–70× P/E requires (growth × duration × ROE), compute the multiple-drag on forward returns, and judge a premium multiple without either worshipping or dismissing it.
- Build a full comps table end-to-end, one Indian sector and one US sector, from raw filings to a one-paragraph finding that attributes every premium and discount to a driver, and pass a timed comps workup graded against a key.
Prerequisites & connections
Builds on. M3.05 directly: the Gordon growth model is the engine under every justified multiple below, and the reverse DCF is the full-strength version of what "reversing a multiple" does in shorthand. M3.04: g = reinvestment rate × ROIC, the discipline that links growth to reinvestment, reappears inside every enterprise-multiple formula as the (1−g/ROIC) term. M3.03: the r in every equity formula is that module's cost of equity; the WACC in every EV formula is its WACC (we keep the sibling modules' illustrative mid-2026 anchors: US cost of equity ~8.5–9%, WACC ~8.5%; India cost of equity ~11.5–12%, WACC ~11.5%, verify live before real use). M2.01–M2.05: ROE, ROIC/ROCE, margins, and the benchmarking discipline (normalize before comparing) are the fundamentals every multiple must be paired with. M1.08: lease accounting across the three standards, the single biggest cross-border comps trap. M2.06–M2.07: one-off detection; a comps denominator is only as good as your shenanigan filter.
Feeds forward. M3.07: EV/IC versus ROIC/WACC is the value-creation plot that module builds its capital-allocation verdicts on. M3.09: the comps and precedent-transaction tables you build here become two bars of the football field, built in a spreadsheet with full mechanics. M3.10: the phase capstone requires a three-way valuation (DCF, comps, reverse DCF) of one Indian and one US company, and the second leg is the one you build here. Phase 5 gives every sector its own multiple lens (P/B for banks, EV/EBITDAR for airlines, P/EV for life insurers). The grammar taught here is what makes those lenses safe to use. Phase 8's teardown question 11 ("what is the market implying?") is, nine times out of ten, answered by reversing a multiple exactly as taught here.
A multiple is a price divided by a fundamental, and it is cheap or expensive only relative to the drivers that justify it: growth, returns on capital, and risk. So the analyst's job is never to rank a column of numbers but to decompress each one and ask what it assumes.