Strategy & Corporate Finance Practice

Multiples analysis:
Industry labels don’t
matter, performance does
Our research highlights the variability of multiples within and
across industries and refutes the idea that there is a shortcut to
higher valuation.

by Alok Bothra and Zane Williams

© z_wei/Getty Images

September 2019
 We hear executives theorize all the time about trade at multiples lower than 15 times EV/EBITDA.2
whether a change in industry classification1 But the higher performers—those companies
could boost their companies’ valuation, even if that consistently deliver superior returns on invested
underlying performance didn’t change very capital and revenue growth—steadily trade at a
much. For instance, if an insurance company were multiple of more than 15 times EV/EBITDA (Exhibit 1).
classified as a “wealth manager” rather than What’s more, multiples are highly variable within
an “insurer,” it could trade at higher multiples, and industries themselves, reflecting the differing
its valuation would increase. Right? growth rates and profitability of different parts of
the economy (Exhibit 2).
Not so fast.
The numbers suggest that there are no shortcuts
Our research underlines the degree to which to higher valuation.3 For a company to realize
corporate performance and multiples are the industry-average multiple, it must match the
MoF72 2019 inextricably linked. Companies in the packaged- industry-average expected performance.
Multiples analysis: Industry labels industry,
food-and-meat for instance,
don’t matter, generallydoes
performance There’s not much executives can do to directly
Exhibit 1 of 2

Exhibit 1

Underlying performance drives variation in multiples.

Industry example: Multiples used in packaged food and meat1
Median ROIC,2 2019, % Median revenue growth, 2019–21E, %

42 3
40

29

1 1

<12× 12–15× >15× <12× 12–15× >15×

EV/EBITDA3 EV/EBITDA3
1
Based on a sample of 19 US-based packaged-food-and-meat companies with a market cap of ≥$1 billion.
2
Return on invested capital. Excludes goodwill and nonoperating intangibles.
3
EV = enterprise value; EBITDA = earnings before interest, taxes, depreciation, and amortization. Based on EV and analysts’ consensus EBITDA estimate
as of June 7, 2019.
Source: S&P Capital IQ; McKinsey analysis

Industry classifications group companies together based on an economic taxonomy that considers similarity of products, processes, behaviors,
1

and other factors.

2 
“EV/EBITDA” refers to the ratio of enterprise value to earnings before interest, taxes, depreciation, and amortization. This is a measure of the
cash flow available to a company.
3
Susan Nolen Foushee, Tim Koller, and Anand Mehta, “Why bad multiples happen to good companies,” May 2012, McKinsey.com.

2 Multiples analysis: Industry labels don’t matter, performance does

 Multiples analysis: Industry labels don’t matter, performance does
Exhibit 2 of 2

Exhibit 2

Multiples vary significantly within different sectors.

2019 EV/EBITDA in S&P 5001 Gap in Number of
P25 Median P75 P25–P752 companies

0× 5× 10× 15× 20× 25×

Financial3 6.3 66

Consumer discretionary 7.1 59

Utilities 2.4 28

Energy 2.7 26

IT 11.8 66

Healthcare 10.6 58

Materials 7.7 27

Consumer staples 6.8 33

Communication services 5.5 24

Industrial 6.0 68

Real estate 5.9 15

0× 5× 10× 15× 20× 25×
1
EV = enterprise value; EBITDA = earnings before interest, taxes, depreciation, and amortization. Based on EV and analysts’ consensus EBITDA estimates
as of June 7, 2019. S&P 500 companies with meaningful P/E multiples (470 in total) divided by sector.
2
Difference between 75th percentile and 25th percentile values.
3
Using 2019 estimates of P/E multiples for financial companies.
Source: S&P Capital IQ; McKinsey analysis

affect industry classifications and market variability, reallocating resources, monitoring outcomes, and
but they can control their companies’ efforts otherwise enhancing corporate performance
to create more growth, higher margins, and greater over the long term. Doing so will steadily improve a
capital productivity. Business leaders must do the company’s share price, even if it doesn’t immediately
hard work of revising business strategies, result in higher multiples.

Alok Bothra ([email protected]) is an expert and Zane Williams ([email protected]) is a senior expert
in McKinsey’s New York office.

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