Why might industry-specific multiples vary significantly?

Industry-specific multiples can vary significantly due to the unique financial structures inherent to each industry. Different industries have distinct revenue models, capital requirements, profit margins, and operational risks, all of which influence valuation multiples such as Price-to-Earnings (P/E), Enterprise Value-to-EBITDA (EV/EBITDA), and others.

For example, capital-intensive industries like utilities will typically have different multiples compared to technology firms, which may have higher growth rates and lower capital expenditures. This variance arises from how companies within those industries are financed, their growth trajectories, and even regulatory environments, all of which are particular to certain sectors. The adjustment of multiples to account for these unique factors is fundamental for accurate valuations.

Evaluating companies using comparable industry multiples requires an understanding of these differences to ensure that the comparison reflects the true economic realities of each sector.