384  Using Multiples
rates line up with the ranges of multiples. Swallow, with a multiple of 12 
times, is valued right in line with the other two companies (Owl and Robin) 
that have similar ROIC and growth. If you didn’t know Swallow’s multiple, 
your best estimate would be the average of Owl and Robin, 12 times, not the 
average of the entire sample or some other sample.
Once you have collected a list of peers and measured their multiples 
properly, the digging begins. You must answer a series of questions: Why 
are the multiples different across the peer group? Do certain companies in 
the group have superior products, better access to customers, recurring rev-
enues, or economies of scale? If these strategic advantages translate to su-
perior ROIC and growth rates, better-positioned companies should trade at 
higher multiples.
Alternative Multiples
Although we have so far focused on enterprise value multiples based on 
EBITA or NOPAT, other multiples can prove helpful in certain situations. 
The EV-to-revenues multiple can be useful in bounding valuations with 
volatile EBITA. The P/E-to-growth (PEG) ratio somewhat controls for differ-
ent growth rates across companies. Nonfinancial multiples can be useful for 
young companies where current financial information is not relevant. This 
section discusses each of these alternative multiples.
Enterprise Value to Revenues
In most cases, value-to-revenues multiples are not particularly useful for ex-
plaining company valuations, except in industries with unstable or negative 
profits. We’ll use a simple example to illustrate. Companies A and B have the 
same expected growth, ROIC, and cost of capital; the only difference is that 
A’s EBITA margin is 10 percent, while B’s is 20 percent (B is more capital inten-
sive, so its higher margin is offset by its greater invested capital). Because the 
companies have the same ROIC and growth, their value-to-EBIT ratios must 
be the same (13 times, based on the value driver formula). But the resulting 
value-to-revenues multiple is 1.3 for A and 2.6 for B. In this case, the value-
to-revenues multiple tells us nothing about the valuations of the companies.
EV-to-revenues multiples are useful as a last resort in several situations. 
One is in the case of start-up industries, where profits are negative or a sus-
tainable margin level can’t be estimated. Another is in industries with highly 
volatile profit margins, where you believe that over the long term the compa-
nies will have roughly similar profit margins. You might also find situations 
where a company is periodically spending more on research and development 
(R&D) or marketing than its peers, so its earnings are temporarily depressed. 

Alternative Multiples  385
If investors are confident about the return to profit margins similar to those 
of peers, an EV-to-revenues multiple in line with peers might prove more rel-
evant than an EV-to-EBITA multiple that is out of line with peers. Finally, a 
revenue multiple can provide a quick understanding of the potential value a 
company could generate if it were able to achieve the same levels of growth, 
operating margins, and capital efficiency as its peer group.
PEG Ratio
Some analysts and investors use a P/E-to-growth (PEG) ratio to assess the 
value of a company. For example, a company with a P/E of 15 and expected 
growth of 4 percent would have a PEG ratio of 3.75:
PEG ratio
P/E
Growth
100
=
×
=
×
=
15
4
100
3 75
%
.
The PEG ratio is seriously deficient, however, because it doesn’t take into con-
sideration ROIC, which, as seen earlier, has a significant impact on a com-
pany’s valuation.
While the concept of relating P/E to growth is relevant, there is no math-
ematical derivation that says you can simply divide one by the other and 
produce a significant result. Furthermore, there is no standardized approach 
for PEG ratios, particularly the choice of time horizon for growth. Should it 
be one year, five years, or a decade? The choice of horizon can make a big dif-
ference, as growth tends to flatten out over time. A company with 6 percent 
expected growth over five years may have only 4 percent expected growth 
over ten years. Shifting the growth horizon, in this case, would increase a 
company’s PEG ratio by 50 percent. Finally, as you increase the time frame, 
growth rates in an industry will converge, so you will end up with differences 
in the PEG ratios just reflecting differences in P/Es.
The bigger problem, though, is ignoring ROIC. Exhibit 18.12 shows a DCF 
valuation we conducted for two companies. Company A has a higher ROIC 
(30 percent, versus 14 percent for B), while Company B has higher expected 
Exhibit 18.12  PEG Ratios Distorted by ROIC Differences
Company A
Company B
ROIC, %
30
14
Expected growth years 1–10, %
5
10
Expected growth after year 10, %
3
3
WACC, %
9
9
P/E = EV/NOPAT, times
17.0
17.0
PEG ratio, times
3.4
1.7