The idea of Trading Multiples models is straightforward: we assume that similar companies in the same industry should be trading at the similar range of earnings multiples. It is subjective on how two companies are considered similar. Our models take into consideration a variety of factors such as industry, market capitalization, country, revenue, etc... to decide whether any two companies are similar.

There are also a few versions of earnings multiples available such as Price/Earnings (P/E), Enterprise Value/EBITDA (EV/EBITDA), Price/Revenue, Price/Book Value, etc... We support 2 most popular earnings multiples which are P/E and EV/EBITDA. Note that for financial firms such as banks and insurance companies, EBITDA is not meaningful so P/E is the only Trading Multiples model available for them (check out the reason here).

The steps to build a Trading Multiples model are:

• 1. Find a list of similar companies.
• 2. Compute their earnings multiples (P/E or EV/EBITDA).
• 3. Take the median of those multiples.
• 4. Multiply the median with our company's earnings to get the final valuation.

In this guide, we use Apple Inc as an example and we will walk you through how to build a P/E and EV/EBITDA model for Apple Inc.

First, we compute the P/E ratio for each peer/similar company of Apple. Here we use both trailing and forward P/E. We then take the median of these multiples and assume that this median multiple is the fair multiple for Apple Inc. Then we multiple the median multiple with Apple's trailing and forward profit after tax to obtain its fair Equity value. To calculate the fair price, we divide the Equity value by the number of outstanding shares.

First, we compute the EV/EBITDA ratio for each peer/similar company of Apple. Here we use both trailing and forward EV/EBITDA. We then take the median of these multiples and assume that this median multiple is the fair multiple for Apple Inc. Then we multiple the median multiple with Apple's trailing and forward EBITDA to obtain its fair Enterprise value. To get the Equity value, we simply deduct the company's debt from and add the company's cash to the Enterprise value. Finally, we divide the Equity value by the number of outstanding shares to get the fair price.