The accuracy of alternative stock valuation methods – the case of the Warsaw Stock Exchange

Abstract

The main aim of this article is to examine the accuracy of different methods of share valuation used by Polish analysts in reports prepared in order to issue recommendations for companies listed on the Warsaw Stock Exchange. In the literature on the subject, the view which prevails is that the more sophisticated methods, i.e. those taking into account the discounting process, are characterised by higher valuation accuracy. However, the results of the present analysis show that Polish analysts achieve more accurate valuations using the market approach than the DCF model. Nevertheless, the highest level of accuracy is achieved by the target price, which in most cases is the value of the weighted average of valuations obtained via a market valuation and discounting methods. In terms of the multiples which are taken into account in this research, the highest accuracy is achieved with the use of EV/EBIT, although there are no statistically significant differences between the valuations calculated using this multiple and the results obtained with the P/E and EV/EBITDA multiples. Valuations prepared with the use of individual multiples usually generate greater errors compared to the DCF model and the market approach, which uses the weighted average of the valuations achieved with individual multiples.