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Market conditions heavily influence valuation multiples from "summary" of Valuation by McKinsey & Company Inc.,Tim Koller,Marc Goedhart,David Wessels
Valuation multiples serve as essential tools for assessing a company's worth in relation to its earnings, cash flow, or other financial metrics. However, these multiples do not exist in a vacuum; they are significantly shaped by the prevailing economic environment and industry dynamics. When market sentiment is optimistic, multiples tend to expand as investors are willing to pay a premium for growth opportunities. Conversely, during periods of uncertainty or recession, valuation multiples can contract as risk aversion increases and investors focus on preserving capital. Several factors contribute to this phenomenon. Interest rates play a crucial role; lower rates decrease the cost of capital, thereby enhancing the attractiveness of equity investments and leading to higher multiples. Additionally, overall economic growth expectations can drive multiples up, as companies are perceived to have better growth prosp...
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