How should you factor in a company's competitive advantage during a valuation?

When valuing a company, one should take its competitive advantage into account by considering higher percentiles of multiples. A competitive advantage means that the company has attributes that allow it to generate greater profitability or maintain better market positions compared to its peers. By looking at higher percentiles of multiples, you can capture the valuation that reflects this superior performance.

This method recognizes that companies with strong competitive advantages often trade at premiums because investors are willing to pay more for consistent earnings growth, higher market share, or superior product offerings. Therefore, selecting multiples that fall within the higher range tends to yield a more accurate representation of the company's true value based on its distinct market position and performance.

Using median multiples ignores the nuances of a company’s competitive setting and may undervalue firms with significant strengths. Ignoring market sentiment would not accurately reflect investor perceptions that can influence valuations, while applying a flat premium to all multiples fails to account for the varying degrees of competitive advantages across different companies, thus lacking the precision needed for thorough valuation analysis.