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This process of standardizing creates valuation multiples. Multiples analysis is one of the oldest methods of analysis.
It was well understood in the 1800s and widely used by U. 20th century, although it has recently declined as Discounted Cash Flow and more direct market-based methods have become more popular.
A valuation multiple is simply an expression of market value of an asset relative to a key statistic that is assumed to relate to that value. E ratios is lessened by the fact that earnings per share is subject to distortions from differences in accounting rules and capital structures between companies. These multiples reveal the rating of a business independently of its capital structure, and are of particular interest in mergers, acquisitions and transactions on private companies. Not all multiples are based on earnings or cash flow drivers.