Danisco 1Q 2008-2009: Genencor

Abstract

Relative valuation involves the use of similar comparable assets in valuing another asset. Relative valuation is also known as comparable valuation. Price earnings (P/E) ratio is the most commonly used relative valuation measure in industry. In relative valuation, the benchmark might be the multiple of a similar company or the median average value of the multiple for a peer group companies, an economic sector, an equity index or median, or an average own past value of the multiple. Empirical research advocates the use of forward-looking multiples as they are considered to be more accurate predictors of value. The process of relative valuation starts with the selection of a peer group. Peer group selection is based on defining industry attributes, matching companies on size, growth, margins, asset intensity, and risk. Multiples are classified as earnings multiples, book value multiples, revenue multiples, and sector-specific multiples. Forward multiples are basically applied to a firm’s next 12-month earnings before interest, tax, depreciation and amortization (EBITDA) or earnings before interest, tax and amortization (EBIT). Forward multiples are used to value high-growth companies that expect better future earnings in the future period. The P/E ratio valuation plays an important role among investment analysts and advisors. Enterprise value (EV) multiples are expressed as a ratio of capital investment to a financial metric, which is attributable to the providers of capital. EV equals market value of equity plus debt minus cash. The important equity price-based multiples include P/E, PEG, P/B, P/CF, and dividend yield. The major EV-based multiples include EV/EBITDA, EV/EBIT, EV/CF, EV/Invested capital, etc.