Valuation Multiples

Equity Valuation in R

Cliff Ang

Senior Vice President, Compass Lexecon

Price-to-Earnings Ratio

  • One of the most common valuation multiples used
  • P/E Ratio = Market Price of Stock / Earnings Per Share (EPS)
    • EPS can be historical - i.e., last twelve months (LTM)
    • EPS can be forward-looking - i.e., next twelve months or next fiscal year
  • P/E Ratios are not meaningful when the EPS is negative
Equity Valuation in R

Price-to-Book Ratio

  • Another common valuation multiple
  • P/B Ratio = Market Price of Stock / Book Value Per Share
    • Book Value can be historical - i.e., last fiscal quarter's equity
    • Book Value can be forward-looking - i.e., estimates of future book value
  • Book Values are usually positive but there are some cases when book values are negative
Equity Valuation in R

Implying the Price

Steps in determining the Implied Price

  • A set of comparable companies are identified
  • The appropriate metric or metrics are determined
  • The median or average valuation multiple is selected
  • The valuation multiple is applied to the subject firm's metric
Equity Valuation in R

Implying the Price

Relative valuation generates an Implied Price

  • Dependent on valuation of comparable companies
Equity Valuation in R

What is the value of a midcap financial firm with BVPS of $30?

finl <- subset(midcap400, gics_sector == "Financials")

finl$p_bv <- ifelse(finl$bvps < 0, NA, finl$price / finl$bvps)
finl <- finl[complete.cases(finl), ]
avg_p_b <- mean(finl$p_bv) avg_p_b
2.688627
bvps <- 30
implied_price <- avg_p_b * bvps
implied_price
80.65881
Equity Valuation in R

Let's practice!

Equity Valuation in R

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