Though this method has been used left right center by the startup space, this method has gained acceptability in listed space too.
The main crux of this method is if a similar company has raised capital in your industry the analyst community can get an idea of what multiples the investors are willing to pay at the current junction for a particular type of business and then use the same valuation multiple to value a similar company that they may be analyzing.
This method has been traditionally also applied by analyst in the listed space to value/re-rate a listed company based on the Multiple a peer company is getting at the time of applying for an IPO (we strongly disagree with this approach but well we are not Jhunjhunwala or Buffett so let's stick to understanding you what works on the street)
You can use this to either take an estimate for exit multiple or you can also use this method to value your company at current point using pricing mechanism i.e. taking your company any suitable financial parameter like Sales, EBITDA, PAT, Book Value per Share (BVPS) and multiply it by the expected multiple on these parameters i.e. EV/Sales, EV/EBITDA, P/E. P/B ratio respectively. The expected multiple to apply on your company's financial parameter will be obtained through a peer company recent transaction.
Note: We will also be explaining all the valuation ratio in valuation series in later post.😀😀
Let's say you are analyzing private banking space
Post Covid there were many QIPs (Qualified institutional placements) in banking industry, So if you open their QIP document you will get to know at what multiple your peers have raised money. So below is transaction summary of ICICI Bank's QIP that happened around June 2020 and let's see how an analyst could have used this to value Axis Bank:
So if you believe Let's say Axis bank is comparable to ICICI Bank, you can take this Implied P/B ratio of ICICI QIP transaction to calculate Axis Bank Market Cap/Valuations.
For Data Extraction look at our snapshot attached below of QIP document of ICICI Bank: