A multiple is simply an expression of market value relative to a common statistic that is assumed relative to that value. They are often used for quick comparisons between companies. Enterprise multiples often express the value of entire enterprise whereas equity multiples express the value of shareholder claims on business.
But multiples have their own problems.
Multiples combine a great deal of information into a single number. Combining many value drivers into a single number can lead to erroneous interpretation.
Multiples are difficult to compare. The results also depend on type of multiples used. P/E ratio gets distorted by the capital structure of the company, All else being equal, the company with a lower debt will have a higher P/E ratio. Enterprise multiples on the other hand are not affected with that distortions and hence TEV/EBITDA is used by most sophisticated investors.
If the multiples are too low for a company, the probably the company is being compared with a wrong set of peers. For multiples analysis, the relevant companies are those that compete in same markets and have similar growth prospects.
It is seen that in mature industries multiples vary little among peers. Even if companies outperform their competitors , there is a convergence of growth and returns hence it is difficult to predict which companies will actually outperform. Hence, a company’s multiples are largely uncontrollable.
Hence generally multiples are used in conjunction with other valuation methods like DCF.