Sunday, 30 April 2017

Multiples based on Comparables

This method compares relative values estimated using multiples to determine whether an asset is 
  • undervalued, 
  • overvalued or 
  • fairly valued.  

The benchmark multiple can be any of:

  • A multiple of a closely matched individual stock.
  • The average or median multiple of a peer group or the firm's industry.
  • The average multiple derived from trend or time-series analysis.
Analyst should be careful to select only those companies that have similar size, product lines, and growth prospects to the company being valued as comparables.

Price to cash flow ratio 

P/CF = Market price of share / Cash flow per share

Price to sales ratio

P/S = Market price per share / Net sales per share
P/S = Market value of equity / Total net sales

Price to Book Value ratio

P/BV = Current market price of share / Book value per share
P/BV = Market vale of common shareholders' equity / Book value of common shareholders' equity

Book value of common shareholders' equity 
= (Total assets - Total liabilities) - Preferred stock

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