What is a key issue with using comparable public company multiples for valuation?

Using comparable public company multiples for valuation often involves a challenge related to how it reflects historical performance rather than the current market dynamics. This approach relies on data from similar publicly traded companies and typically emphasizes the historical earnings or financial metrics to derive valuation multiples. As a result, such multiples may not accurately capture the growth potential or future performance of the target company, especially if market conditions or the business context have changed since the companies being compared reported their results.

Valuation using multiples assumes that past performance is indicative of future results, which can be misleading. For instance, if a comparable company has enjoyed exceptional growth in a previous market cycle, simply applying its historical multiple to a different context may not provide a reliable valuation. Consequently, while the historical analysis is valuable, relying solely on it can be a significant limitation in a dynamic business environment where forward-looking factors should be considered more prominently.