The “multiple” (or comparable) method and the discounted cash flow (DCF) method are two valuation approaches that, although complementary, are based on fundamentally different philosophies, methodologies and perspectives.

Here are the main distinctions:

1. Philosophy: Observation vs. Construction

• The Multiple Method (Observation): It seeks to determine the value of the company by observing the “average opinion of the market”. It does not attempt to explain intrinsic value, but notes the price that investors are willing to pay for similar assets at a given time.
• The DCF (Construction) method: It builds the specific opinion of the investor or buyer. It is based on the principle that an asset is worth what it is able to generate in terms of cash flow in the future, given its risk. It reflects a strategic and operational vision specific to the person conducting the evaluation.

2. The calculation methodology

• The multiple method: It is analogical. It consists of calculating (multiple) ratios on a sample of comparable companies (e.g. Capitalisation/Net Income for P/E ratio, or Enterprise Value/EBITDA) and applying these ratios to the accounting data of the company to be valued.
• The DCF method: It is analytical. It requires the construction of a financial model (Business Plan) to project  future Free Cash Flows. These flows are then discounted to the Weighted Average Cost of Capital (WACC) to obtain the Enterprise Value.

3. The Perspective: Minority vs. Majority

It is important to note a distinction often made between the two methods depending on the investor’s power:

• Multiples (Minority Perspective): This method is often associated with the valuation of minority shareholders. They have no influence on the strategy and rely on the market’s opinion on the future of the company.
• DCF (Majority/Acquirer Perspective): This method corresponds to the perspective of a controlling shareholder (majority). By taking control, the acquirer can transform the business, implement synergies and influence future flows. This is why the price from a DCF (including a control premium) is often higher than the share price (which reflects a minority valuation).

4. Respective limits

• For multiples: The major difficulty lies in identifying truly “comparable” societies, comparability being often subjective and imperfect. In addition, it notes a value without explaining it.
• For DCF: The result is extremely sensitive to the assumptions made (growth rate, WACC), and particularly to the terminal value (the value of the company at infinity after the explicit forecast period), which can represent a disproportionate share of the total value and be based on optimistic bets.

In short, no method is superior to the other; they have different objectives. Multiples are often used to identify market consensus or set an IPO price, while DCF is used to validate the profitability of a strategic investment or acquisition.