Equity valuation using multiples

Question 1

What is equity valuation using multiples?

Answer 1

Equity valuation using multiples is a method of estimating a company’s value by comparing it to similar companies based on specific ratios or multiples, such as earnings, book value, or sales.

Question 2

What are the findings regarding the relative performance of different value drivers?

Answer 2

Forward earnings perform best, especially with longer forecasts and aggregated earnings. Intrinsic value lags behind due to errors from additional information and variables. Historically, the order of effectiveness is earnings > book value > sales. Using Enterprise Value (EV) instead of equity value improves the performance of sales and EBITDA multiples.

Question 3

What specifications improve the performance of equity valuation using multiples?

Answer 3

Using harmonic means improves results, while considering firms in different years as similar decreases performance. Allowing for an intercept in multiple estimations enhances results, especially for poorer multiples. The best multiple remains consistent across different times and sectors.

Question 4

Why are sales alone not sufficient for valuation?

Answer 4

Sales must be considered alongside expenses to provide a more accurate representation of a company’s financial health and future prospects.