Hello Peter,

Thank you so much for your thoughtful question, and for reading the article so carefully!

To me the denominator in evaluating a prospective business for purchase (whatever the security they are offering: debt, preferred, convertible, equity, et. al.) is the quality of a management team's ability to invest capital. Ideally you have a numerator that is returns on capital and a denominator that is total capital. Navigating to this equation for all prospective investments is, to me, what makes businesses comparable. How a management team does this over time, and an evaluation of their ideas for how to invest capital in future capital-generating projects, is the only other quantitative ingredient. The qualitative ingredients are many, but their ethics and transparency are paramount to me.

As for using multiples...my first step would be to make the adjustments to financial statements necessary to make clear the returns on capital, as described above. If there is only a slight difference in the returns on capital of different firms, but very different multiples, then this is one way of evaluating the sophistication of an industry's investors. If there are limited differences in returns on capital and future prospects, but the multiples (P/E, P/BV, P/EBITDA, et. al.) then it likely means that the industry's investors are not doing their homework.

Yours, in service,

Jason