Using P/E ratio to value a company sounds simple.But it’s often wrong.

Sometimes clients ask if we can estimate the value of a company by simply applying P/E or P/B ratios from listed companies in the same industry.

In theory, the approach is straightforward.

We take the book value or earnings of the target company (from the latest audited financial statements) and multiply it by the P/B or P/E ratios of comparable listed companies.

However, even if companies operate in the same industry, they can be very different in terms of:

• Business size
• Asset base
• Capital structure
• Growth prospects
• Risk profile
• Management strategy

These differences can significantly affect valuation.

As a result, applying P/E or P/B multiples from listed companies to a private company without deeper analysis may produce a value that does not reflect the true economic reality of the business.

#ORNA #BusinessValuation #Consult