The use of multiples in the South African equity market: is the popularity of the price earnings ratio justifiable from a sector perspective?

Abstract

The price earnings (P/E) ratio is generally regarded as the most popular multiple used to value equity in practice. Although this is supported by evidence from practice, the use of the P/E ratio has not been substantiated by evidence from research. This article investigates the accuracy of the five most popular multiples, including the P/E ratio, in valuing the equity of South African companies listed on the JSE Securities Exchange, for the period 1988 to 2007. The research results revealed that the P/E ratio does not perform the most accurate valuations across all sectors and that different multiples should be used for different sectors. There is an opportunity to enhance the accuracy of equity valuations based on multiples by employing multiples other than the P/E ratio.