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Relative Valuation – Accuracy of Corporate Valuation Using Multiples

Pétursson, Einar LU (2016) NEKN02 20161
Department of Economics
Abstract (Swedish)
This paper investigates the accuracy of three different methods that are used to perform a relative valuation. I also study the valuation accuracy of the three most widely used multiples used within these methods, the enterprise value to EBITDA (EV/EBITDA), the forward-looking price per share to earnings per share (P/EPS1), and the price-book (P/B). In addition, the difference between industries regarding valuation accuracy is investigated. A sample containing 246 companies listed on S&P Europe 350 during 2013-2015 is used. Method 1 uses comparable companies based on industry membership, and harmonic mean as a statistical measure to generate a multiple. Method 2 uses six companies from the same industry, that are similar in a relation to a... (More)
This paper investigates the accuracy of three different methods that are used to perform a relative valuation. I also study the valuation accuracy of the three most widely used multiples used within these methods, the enterprise value to EBITDA (EV/EBITDA), the forward-looking price per share to earnings per share (P/EPS1), and the price-book (P/B). In addition, the difference between industries regarding valuation accuracy is investigated. A sample containing 246 companies listed on S&P Europe 350 during 2013-2015 is used. Method 1 uses comparable companies based on industry membership, and harmonic mean as a statistical measure to generate a multiple. Method 2 uses six companies from the same industry, that are similar in a relation to a profitability measure, using harmonic mean as a statistical measure to generate the multiple. Method 3 uses comparable companies based on industry membership and regression as a statistical measure to generate a multiple. I find that Method 2 provides the lowest valuation errors when used with the EV/EBITDA multiple and the P/B multiple. However, for the P/EPS1 multiple, all methods provide similar results. Method 1 provides the second best results, and Method 3 delivers the worst results. Regarding the multiples, I find that P/EPS1 deliver consistently best results, the EV/EBITDA comes second, and the P/B provides the worst results. Finally, the industrials and the consumer services industries have the lowest valuation error, and the financials industry highest valuation error. (Less)
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author
Pétursson, Einar LU
supervisor
organization
course
NEKN02 20161
year
type
H1 - Master's Degree (One Year)
subject
keywords
accuracy, comparable companies, EV/EBITDA, multiples, P/B, P/EPS1, relative valuation, valuation
language
English
id
8877531
date added to LUP
2016-06-13 14:15:40
date last changed
2016-06-13 14:15:40
@misc{8877531,
  abstract     = {This paper investigates the accuracy of three different methods that are used to perform a relative valuation. I also study the valuation accuracy of the three most widely used multiples used within these methods, the enterprise value to EBITDA (EV/EBITDA), the forward-looking price per share to earnings per share (P/EPS1), and the price-book (P/B). In addition, the difference between industries regarding valuation accuracy is investigated. A sample containing 246 companies listed on S&P Europe 350 during 2013-2015 is used. Method 1 uses comparable companies based on industry membership, and harmonic mean as a statistical measure to generate a multiple. Method 2 uses six companies from the same industry, that are similar in a relation to a profitability measure, using harmonic mean as a statistical measure to generate the multiple. Method 3 uses comparable companies based on industry membership and regression as a statistical measure to generate a multiple. I find that Method 2 provides the lowest valuation errors when used with the EV/EBITDA multiple and the P/B multiple. However, for the P/EPS1 multiple, all methods provide similar results. Method 1 provides the second best results, and Method 3 delivers the worst results. Regarding the multiples, I find that P/EPS1 deliver consistently best results, the EV/EBITDA comes second, and the P/B provides the worst results. Finally, the industrials and the consumer services industries have the lowest valuation error, and the financials industry highest valuation error.},
  author       = {Pétursson, Einar},
  keyword      = {accuracy,comparable companies,EV/EBITDA,multiples,P/B,P/EPS1,relative valuation,valuation},
  language     = {eng},
  note         = {Student Paper},
  title        = {Relative Valuation – Accuracy of Corporate Valuation Using Multiples},
  year         = {2016},
}