The Accuracy of Multiples

Abstract

Problem statement: Equity valuation with the use of multiples is widely used by academics and practitioners concerning its functionality. This study aims to explore the sensitivity of three multiples in terms of accuracy. Approach: Price-to-Sales (P/S) multiple, the price-to-book value of equity (P/B) multiple and the Price-to-Earnings (P/E) multiple are three multiples under consideration, using both current and one-year-ahead earnings forecasts. Results: Evidence of empirical results show that, the multiples P/mdfy1 and P/mnfy1 are effective in terms of accuracy, with their means being negatively biased and their medians being positively biased. Finally, current earnings are identified as more appropriate value driver for the calculation of the P/E ratio by terms of accuracy. The results can be considered as reliable owing to the large sample and the procedure followed for its selection. Conclusion: This study offers a better understanding of the valuation approach through the use of multiples, in order analysts assumption to be more carefully and properly chosen and their results to be more accurately produced.