What multiples would you use for a bank, a REIT, an oil producer and a software company?

Match the multiple to what drives value: P/E and price to tangible book for a bank, price to FFO and AFFO for a REIT, EBITDAX and reserves for an oil producer, and revenue or EBITDA multiples for software depending on maturity.

The numbers, step by step

The bank example uses the steady-growth formula: price to tangible book equals the return minus growth, divided by the cost of equity minus growth.

Price to tangible book at a 13% return(13% − 3%) ÷ (10% − 3%)

1.43x

Price to tangible book at an 8% return(8% − 3%) ÷ (10% − 3%)

0.71x

Rule of 40 check30% growth + 10% margin

40%

What the interviewer listens for

• Do you explain why EV to EBITDA fails for a bank?
• Do you know FFO and AFFO and what they adjust?
• Do you name EBITDAX and reserve or production metrics for oil?
• Do you separate early software from mature software?
• Do you tie each choice to what drives value?

Common mistakes

• Using EV to EBITDA for a bank, whose interest is an operating cost.P/E and price to tangible book are the standard.
• Valuing a REIT on P/E, when real estate depreciation makes net income understate cash earnings.
• Defining FFO as net income plus all depreciation.It adds back real estate depreciation and removes gains on property sales.
• Saying every software company trades on revenue.Mature, profitable ones trade on EBITDA or free cash flow.

Likely follow-ups

• Why tangible book rather than book for a bank?Goodwill and intangibles from acquisitions can't absorb losses the way tangible capital can, so tangible book is a cleaner measure of what backs the shares.
• What is the rule of 40?A rule of thumb that revenue growth plus profit margin should be at least 40%. A software company growing 30% with a 10% margin meets it.
• How would you value an insurer?Like a bank, on equity: P/E, price to book and return on equity against the cost of equity, because its float is part of operations.

More finance technicals

• How does valuing a private company differ from valuing a public one?
• What is a control premium, and how big is it usually?
• How do you estimate a company's cost of debt?
• What is the mid-year convention in a DCF, and what does it do to the value?
• Terminal value makes up most of your enterprise value. Is that a problem?

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