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Business Valuation – the Facebook example – PE ratio of over 67

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Business Valuation – the Facebook example – PE ratio of over 67

By , May 30, 2012

There has been a lot of hype in relation to the recent floatation of Facebook – lots of people are recommending it as the stock of the future. With a little valuation methodology you can see why it is dramatically overpriced.

There is lots of talk about the average earnings multiple ( or PE ratio – price / earnings) of businesses who sell or list in this case ( which in some ways is just a sale to lots of people ) . The most recent Australian research ( March 2012 ) on business sales in the SME sector shows that privately held businesses are typically selling for between 2 and 4 times earnings – if your business has an EBIT ( earnings before interest and taxation ) of say $1m then it is estimated it will sell for between $2m and $4m. We often work with business owners to sell a business at a higher multiple – often part of this strategy is to sell to a listed company as they typically trade at higher multiples – the long term average PE ratio for the ASX is actually 9.6

So back to Facebook – which is currently trading at a PE of 67.1 – turnover is $3.7b and EBIT was $1b but the company is “valued” at well over $67b – by comparison Apple is currently trading at a PE of 14 and has a 5 year low of just 8.6 and a five year high of 39.4.

If you extend the maths just slightly – this means that if you invest $28.82 ( todays share price ) it will take Facebook over 46 years to derive the cash flow to generate this value ( cash flow per share is only 62 cents and in fact free cash flow is 0 )

Reminds me of a Warren Buffett quote I often refer to in seminars – ” Price is what you pay – Value is what you get “

Craig West

Craig West

Managing Director | Succession Plus

Craig West is a strategic accountant who has over 20 years’ experience advising business owners. His background as a CPA in public practice, provided invaluable experience in the key issues of concern to business owners. Following 6 years of study to gain two masters degrees, Craig focused on Capital Gains Tax (CGT) for business sales advising on strategic management of tax issues. This experience formed a very strong view that business owners (and often their advisers) were unprepared and unaware of the steps required to prepare a business for exit.

Craig now acts as a strategic mentor for mid-market business owners and has written four critically acclaimed books on employee incentives, succession planning, asset protection and exit strategies. Craig has conducted numerous seminars and keynote presentations throughout Australia & internationally, including adviser education programs for the Institute of Chartered Accountants and CPA Australia.