When Averaging Multiples, the Arithmetic Mean Is Inferior to the Harmonic Mean

Abstract

This article posits that using the arithmetic mean to average multiples is mathematically inferior. A multiple is an inverted ratio with price in the numerator. The harmonic mean is a statistically sound method for averaging inverted ratios. It should be used as a measure of central tendency for multiples, along with the median. Empirically, the harmonic mean and the median of a set of multiples are usually similar. Because the harmonic mean can be overly affected by abnormally low multiples, the valuator must use judgment to exclude outliers.