Learn how Series 86 tests equity value, enterprise value, P/E, P/B, EV/EBITDA, EV/sales, PEG, peer comparison, historical averages, leverage, and price-target ranges.
Series 86 gives the candidate a broad relative-valuation toolkit because no single metric fits every company. The analyst is expected to know what each multiple measures, when it is useful, what it can miss, and how peer and historical comparisons support a price-target range. The exam therefore tests both formula familiarity and method selection.
At a high level, some metrics focus on equity earnings, some on assets, some on cash generation, and some on enterprise-wide value relative to operating performance. The stronger answer usually matches the metric to the company’s economics instead of using a favorite ratio mechanically.
These formulas are simple, but the exam point is judgment. P/E can be useful when earnings are meaningful and comparable. EV-based measures can be more helpful when capital structure differs across peers. Price-to-free-cash-flow, earnings yield, free-cash-flow yield, P/B, and PEG all need the same question: what economic feature is this metric actually capturing?
| Valuation method | Best used when | Common Series 86 trap |
|---|---|---|
| P/E or normalized P/E | earnings are meaningful and comparable | using it on unstable or distorted earnings |
| P/B or tangible book | book value matters economically | treating asset-heavy and asset-light firms the same |
| Price-to-free-cash-flow | cash generation is central and reasonably comparable | ignoring one-time working-capital or capex effects |
| EV/EBITDA or EV/EBIT | leverage differs across peers or operating comparison matters | ignoring what EBITDA or EBIT fail to capture |
| EV/sales | margins or earnings are weak, volatile, or not yet mature | valuing weak revenue the same as high-quality revenue |
| PEG | growth differences matter | treating uncertain growth estimates as precise |
A relative valuation answer is only as strong as the peer group. Series 86 expects candidates to consider business mix, growth profile, margins, geography, customer base, leverage, cyclicality, and accounting comparability. A peer set that includes superficially similar but economically different companies can produce a misleading target multiple.
Historical averages also require interpretation. A company trading below its long-term average may be cheap, but it may also be structurally weaker than it used to be. A company trading at a premium to peers may be expensive, but it may also have better growth, higher margins, lower risk, stronger cash conversion, or more durable returns.
The outline includes debt/EBITDA, debt-to-capital, debt-to-equity, and interest coverage because valuation should respond to risk, not just growth. A company with attractive growth but a fragile balance sheet may deserve a lower multiple than a similar company with cleaner cash generation and less financing pressure. Enterprise-value multiples can help compare operations across different capital structures, but leverage still matters for equity risk and per-share value.
A stock does not become a buy simply because it trades below peers on one ratio. Series 86 expects the analyst to ask whether the lower multiple reflects weaker growth, higher risk, lower quality, more leverage, or a real opportunity. A good relative-valuation conclusion explains the key assumptions behind the implied price-target range and why differing multiples point to different outcomes.
Two companies produce similar operating profits, but one carries much more debt. Which valuation approach is generally stronger if the analyst wants to compare the businesses before financing effects?
A. P/E, because earnings always remove financing differences
B. EV/EBITDA, because enterprise value better captures the whole business across different capital structures
C. Dividend yield, because dividends neutralize leverage
D. Price-to-book, because book value ignores debt levels
Answer: B. Series 86 commonly favors EV-based comparison when leverage differences would distort equity-only measures like P/E.