Equity valuation with the use 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 bias. Approach: The three multiples under consideration are the Price-To-Sales (P/S) multiple, the Price-To-Book value of equity (P/B) multiple and the Price-To-Earnings (P/E) multiple using both current and one-year-ahead earnings forecasts. Results: According to the empirical results, the multiples P/mdfy1 and P/mnfy1 are considered to be biased, with their means being negatively biased and their medians being positively biased. 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. © 2012 Science Publications.