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Full Length Research Paper
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A South
African perspective on the multiples of choice in the
valuation of ordinary shareholders’ equity: From theory to
practice
W. S. Nel
Department of
Accounting,
Stellenbosch University,
Private Bag X1, Matieland 7602, South Africa.
E-mail :snel@sun.ac.za.
Tel: 021-808 3430.
Fax: 021-886 4176.
Accepted 5 February, 2010 |
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Abstract |
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It is imperative that academic theory regarding investment and
finance, and the application thereof in practice, are well
aligned. If there is a gap between what academia advocates in
their lecture halls and what investment practitioners apply in
practice, this may suggest that there is a need to converge
academic thinking regarding the use of multiples per se;
and to narrow the gap between academia and investment
practitioners. This paper investigates how well valuation theory
regarding multiples, as advocated by academia, is aligned with
the multiples that leading financial analysts and corporate
financiers apply in practice. Although multiples are used
extensively in practice as an equity valuation method, no study
has yet compared the preferences of investment practitioners for
certain multiples, with the multiples that academia advocates.
The research results reveal that, although academia and
investment practitioners favour the price earnings ratio and
agree on the suitability of earnings and sales as value drivers;
they disagree significantly with regard to other multiples and
value drivers.
Key words:
Equity valuation, multiples, price earnings ratio, price
earnings growth ratio, cash flows, value drivers, market value
of invested capital, earnings before interest, tax, depreciation
and amortisation, earnings before interest and tax. |
