What drives multiples? a company's value reflects expectations of future cash flows to investors, but what drives these future cash flows Well, the first driver of value is growth if a company's earnings and cash flows grow more quickly. This will increase the future cash flows received by investors. And therefore investors should be prepared to pay more for these future cash flows. This means that there is a direct relationship between growth and a company's value.

The second driver value is return on capital. This refers to how much capital is required for a company to generate its earnings. If a company can generate its earnings using less capital this means that the company needs to reinvest less cash each year to maintain or grow the business. And this therefore increases the amount of cash that can be paid out each year to investors. This means that there is a direct relationship between return on Capital and a company's value. The third driver of value is risk, if a company's future cash flows are more risky investors should expect to pay less for those cash flows as they have less confidence that they will materialize. This means that there is an inverse relationship between a company's riskiness and its value. This is important when analyzing multiples because anything that impacts on a company's value will also impact on that company's multiples. Whether we're using Equity multiples such as PE ratios or EV multiples such as EV to ebit or EV to ebitda. If a company has a higher multiple than its peers. This can be a result of investors having higher growth expectations higher return expectations or if the businesses are quite different lower risk perceptions for the company equally, it can be a combination of these three factors. Equally, if we expect a company to have similar multiples to its peers we're implying that we expect the company to have similar growth returns and risk to its peers.