Valuation Multiples by Sector, Explained
The question
Why do valuation conventions differ by sector? For each of these, name the metric that actually moves value and the valuation method you'd use: a pre-profit SaaS company, a commercial bank, a P&C insurer, a regulated utility, a REIT, and a clinical-stage biotech. Define the combined ratio and say what a 96% combined ratio means. Then explain specifically why EV/EBITDA is wrong for the bank and why the biotech gets no multiple at all.
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The answer
Valuation conventions differ by sector because the multiple has to match where the business is in its life cycle and which line of the P&L is actually meaningful. A pre-profit SaaS company has no earnings yet, so you value it on EV/Revenue and key the multiple off growth and net revenue retention, implying the margins it will reach at scale.
A mature industrial generates stable earnings and D&A, so EV/EBITDA works: it's capital-structure-neutral and strips out non-cash distortions. A commercial bank is a different animal entirely: debt is the raw material of the business, not a financing choice, so enterprise value is meaningless. You value the equity directly with P/B and P/E, and the P/B only rises above 1x when ROE beats the cost of equity.
An airline leases heavily, so you add rent back and use EV/EBITDAR to avoid distorting comparisons between airlines that lease and those that own. An E&P company is capital-intensive and exploration-driven, so you use EV/EBITDAX, which adds back exploration expense, or you can use EV per proved reserves or per flowing barrel.
EV/EBITDA is wrong for the bank precisely because a bank's debt is its raw material, not part of its capital structure, so enterprise value has no meaning and you must value the equity directly.
Enterprise value bridge
| Equity value | 800 |
| + Total debt | 380 |
| − Cash & equivalents | (150) |
| + Minority interest | 20 |
| + Preferred stock | 15 |
| Enterprise value | 1,065 |
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