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

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

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

Implying the Price

Relative valuation generates an Implied Price

Dependent on valuation of comparable companies

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

Let's practice!

Equity Valuation in R