Valuation Multiples: What Every Analyst Gets Wrong

How top long/short analysts really think about valuation multiples: Part 1

Multiples are one of the most common tools in fundamental long/short investing, yet so many analysts consistently misuse them.

Every top analyst/PM uses multiples to frame valuation, test DCF assumptions, explore narratives and compare companies against peers. But if you don’t truly understand what sits underneath them, you can easily fool yourself into thinking you have a variant view when you really don’t. Multiples hide a lot of assumptions, and the underlying drivers aren’t always obvious, even to seasoned analysts.

Getting this right is one of the clearest ways to stand out, whether as an analyst on the job or in an interview for a long/short role. You need to be 200,000x better than just saying “it trades at 10x while peers are at 12x”.

That’s why we are starting this series on multiples and valuation more broadly - to dig deeper into how they actually work, where they mislead and how to use them the way analysts at the top long/short funds do.

Multiples look simple on the surface, but underneath they are always driven by the same three levers: profitability, growth and risk. We’ll start with some quick basics and then move into deeper topics, and (fortunately or unfortunately) we would have to start talking about NOPAT and ROIC.

This is a longer write-up ahead of Labor Day weekend (for anyone in the US), but it sets a lot of the foundation and intuition we will need, so stick with me.