When using trading multiples, which pairing is typically considered consistent with a value driver?

When using trading multiples, which pairing is typically considered consistent with a value driver?

• A. EV/EBIT and SP/EPS
• B. EV/Revenue and Payout ratio
• C. P/E with EV/EBIT
• D. EV/FCF with Dividend Yield

Answer: (A)

When using trading multiples, focus on linking the same source of value to the appropriate valuation base. Enterprise value multiples (like EV/EBIT) measure value relative to the firm’s operating profitability and reflect the entire capital structure. Equity multiples (like SP/EPS, which is effectively a P/E) measure value relative to earnings available to shareholders. Pairing EV/EBIT with SP/EPS keeps the driver consistent: operating profitability drives firm value, and earnings per share drive value for equity owners. The other pairings mix bases that don’t align with the same value driver (revenue omits margins, payout ratio is about cash distribution, mixing enterprise and equity multiples can blur the driver, and dividend yield relates to returns rather than earnings power).

When using trading multiples, focus on linking the same source of value to the appropriate valuation base. Enterprise value multiples (like EV/EBIT) measure value relative to the firm’s operating profitability and reflect the entire capital structure. Equity multiples (like SP/EPS, which is effectively a P/E) measure value relative to earnings available to shareholders. Pairing EV/EBIT with SP/EPS keeps the driver consistent: operating profitability drives firm value, and earnings per share drive value for equity owners. The other pairings mix bases that don’t align with the same value driver (revenue omits margins, payout ratio is about cash distribution, mixing enterprise and equity multiples can blur the driver, and dividend yield relates to returns rather than earnings power).