Valuation Multiples Research Articles

Accuracy of Relative Valuation Methods in Predicting the Offer Price of Indonesian IPO Stocks

The increasing Initial Public Offerings (IPO) trend in Indonesia has created many investment opportunities for institutional and retail investors. However, multiple valuation methods often result in varying IPO price predictions, leading to uncertainty and confusion among investors. This study aims to assess the effectiveness of relative valuation methods in predicting IPO offer prices, focusing on widely adopted methods due to their simplicity and accessibility. The research evaluates three popular relative valuation metrics: the price-to-book (P/B) ratio, the price-to-earnings (P/E) ratio, and the price-to-sales (P/S) ratio. By analyzing companies that went public in Indonesia in 2023 and utilizing average financial ratios from the preceding year, the study seeks to determine which method provides the most accurate price predictions. The findings indicate that the P/B ratio is the most reliable method, achieving an average absolute error of 51.1%. This suggests that the P/B method minimizes valuation errors more effectively than P/E and P/S ratios. Moreover, regression models' P/B ratio demonstrates the highest adjusted R² value of 0.781, further validating its predictive accuracy. The implications of this study are significant for investors and financial analysts who rely on relative valuation methods to make informed decisions about IPO investments. By highlighting the P/B ratio's superior performance in predicting IPO offer prices, this research contributes to the ongoing discourse on valuation methodologies and their practical application in emerging markets like Indonesia.

Torpedo Your Competition: Strategic Reporting and Peer Firm IPO

ABSTRACT A firm’s initial public offering (IPO) generates negative externalities for industry competitors. To mitigate this threat, incumbent firms manage their earnings downward, issue more negative management forecasts, and use a more negative disclosure tone when their industry peers file for an IPO. Negative accruals reverse when the threat subsides. Incumbents manage earnings more aggressively when costs are small and benefits are large, and when they follow negative disclosures of industry leading incumbents. Such strategic disclosure lowers incumbent firm valuation multiples and associates with more negative IPO firm media sentiment. IPO firms obtain lower offer prices, raise less capital, and are more likely to withdraw from the offering. They also invest less, hoard more cash, and experience lower profitability post-IPO, whereas incumbents experience higher profitability and market share growth. Our results highlight the role of strategic reporting on product market competition and identify a new cost of going public.

Private Equity in India Fintech: A Lifecycle Analysis

Over the past two and a half decades, India's venture capital and private equity industry have undergone significant growth, driven by the liberalization of the Indian economy and the emergence of a dynamic start-up ecosystem. While the Fintech sector has been preferred for VCPE investments, research on private equity activity in this industry has been limited. This study aims to address this research gap by providing comprehensive insights into the lifecycle of private equity investments in the Fintech industry in India. The study examines private equity investment and exit activity in the Indian Fintech industry between 1998 and Q1 2023. Our research findings indicate that the Fintech industry in India has attracted considerable investments at notably higher entry valuation multiples. Moreover, a few sectors within the industry have garnered higher investments and valuation multiples. Private equity investors have generated significant returns from exits in the Fintech industry, with M&As being the preferred exit route during the study period. However, our analysis indicates that exit valuation multiples were lower than entry multiples. This research provides valuable insights for investors and entrepreneurs seeking to understand the Indian Fintech industry and its potential for private equity investments.

FINANCIAL ANALYSIS AND VALUATION OF SELECTED UK LISTED COMPANY: A CASE STUDY

Objective: The objective of this study is to investigate the financial analysis and valuation of UK listed companies, with the aim of gaining insight into the financial performance and operational position of Hill and Smith Plc and other key players in the industry. Theoretical Framework: In this study, the main concepts and theories that underpin the research include the irrelevance theory, trade off theory, pecking order theory and market timing theory. These theories explain the underlying factors that determine the financing and valuation choices of listed firms. Method: The study adopted the net assets valuation, dividend discount model, free cashflows, earnings model, comparative companies, and comparative transactions valuation methodologies. The study adopted Hill and Smith Plc as a case study, extracting relevant data from its annual financial records. Results and Discussion: The study revealed a +4.17% abnormal return, suggesting an exceptional performance. It compared financial positions with peers like Morgan Advanced Materials and Keller Group, employing multiple valuation methods. The earnings model indicated a share price of £14.1, suggesting a potential overvaluation in the stock market at £10.0 per share. Research Implications: The practical and theoretical implications of this research are discussed, providing insights into how the results can be applied or influence practices in the field of corporate finance and valuation. These implications impact various stakeholders such as the researched firms, investors, and academia. Originality/Value: This study contributes to the literature by highlighting the valuation methodologies employed in the study, emphasisng the importance of accurate valuation techniques in informing investment decisions.

On the importance of asset pricing factors in the relative valuation

In this study, we examine the implications of multi-factor asset pricing models in corporate valuation, focusing on the relative valuation approach. Our investigation centers around an eight-factor model, which we compare against traditional valuation methods that rely on industry or risk grouping and cross-sectional averages. The purpose of this comparison is to assess the efficacy of incorporating pricing factor variables into the valuation process and to understand their impact on valuation accuracy. The findings of our analysis suggest that the use of the eight-factor model leads to a reduction in estimation errors of valuation multiples, indicating an important improvement in precision compared to conventional valuation methods. Additionally, our research offers insights into the practicality of applying multi-factor models. It contributes to the intersection between empirical asset pricing and corporate finance by providing a detailed evaluation of advanced valuation models and their relevance in improving the accuracy of relative valuation.

Refining expected market return estimation: fusing multiple valuation models as an approach to reducing uncertainty

This paper presents a methodology aimed at reducing the uncertainty associated with estimating the expected market return within a bounded rationality framework. The proposed approach involves calculating the implicit rate of return using various valuation models and subsequently merging them using the Kalman Filter technique to minimize estimation errors. The contribution of this study lies in the application of the Kalman Filter, which enables the expected market return to be refined and provides a more accurate estimate by mitigating uncertainty. The ability to determine an accurately expected market return assumes critical significance in investment decision-making. Therefore, investors can utilize this methodology as a tool to enhance the precision of their investment choices. By reducing uncertainty in estimating the expected market return, this approach empowers investors to make more informed and confident decisions.

Investing Decisions Based on Multiple Valuations - Case Study of Several Chosen Gaming Conglomerates

With the significant growth and transformation in the gaming industry, there is necessity to explore the complexities of investment decisions within several gaming conglomerates by employing multiple valuation methods as a case study and referring to recent data from 2019 to 2023 from U.S. Securities and Exchange Commission, based on stock prices on 12 August, 2023. Briefly introducing the background and the valuation tools, the analysis is mainly divided into two parts, market valuation, including P/E ratio, expected growth rates in EPS and gross revenue and PEG ratio, and profitability valuation, including GP/A ratio and annual and quarterly gross margin trends. In light of the above analysis, a best investing object is selected and the most significant risk factors of investing in the selected stock are listed. It is promising that investors and stakeholders will broaden more profound insights into the financial health, stability, and growth potential of ATVI, SONY, EA, and MSFT and the gaming industry.

Mortgage lending valuation bias under housing price changes and loan-to-value regulations

We examine valuation bias, regulatory loan-to-value limits, and real estate price fluctuations using unique data from two Norwegian banks. We investigate whether automated valuation methods significantly affect foreclosure discounts. Banks using multiple valuation methods tend to report loan-to-value bias by selecting the most optimistic value, underestimating and underreporting risk in declining property markets. This risk increases near regulatory loan-to-value limits, and the findings are robust across homogenous and heterogeneous properties. We recommend reporting automated valuation estimates for all applicable properties and disclosing the percentage of valuations done with different methods to improve transparency and risk comparability between banks.

Market ranking of successful digital business models

The transition from industrial to service economy resulted in a wider adoption of asset-light strategies and technology-enabled business models. In the last ten years, digital companies have ascended to the top of the most valuable firms lists. Various aspects of digital business models have been exhaustively discussed in management literature, but their economic dimension remains under-researched.We analyze how strategy and business model add value and propose using historical volatility of valuation multiples for ranking companies by the degree of investors’ understanding of a firm’s strategy and business model in addition to ratings of companies by market capitalization. This ranking, in our view, is particularly helpful in analyzing business models of digital companies where most of the value is in intangible assets and economic goodwill. We also propose a way of expanding this research topic in the future.

Does valuation uncertainty benefit acquirers or targets?

PurposeWhile the existing studies largely suggest that valuation uncertainty benefits acquirers, who apply discounts to targets' value attributable to information asymmetry, the authors argue that the opposite may be the case.Design/methodology/approachThrough multivariate econometric analysis of transaction data, the authors establish the link between the degree of valuation uncertainty measured by targets' track of public listing and acquisition premia. The authors use text-mining tools to measure acquirer–target similarity and control for its role in intermediating the posited empirical relationships.FindingsHaving analyzed 618 acquisitions involving listed targets from China, the authors find that acquirers pay higher valuation premia for the more recently listed and relatively younger companies than for those with a longer history since floatation. Similar patterns apply to valuation multiples. Higher valuations are partially attributable to premia for control, as acquirers are likelier to buy a majority stake in the recently listed firms, especially if the latter are similar to them. Such transactions take less time to complete and involve a transfer of larger share blocks despite the higher degree of information asymmetry and a frequent lack of targets' operational profitability. The authors also observe a significant premium for target–acquirer similarity: acquirers appear to rush deal completion due to possible overestimation of targets' potential and familiarity bias.Originality/valueThe authors show that acquisition premia may be driven by acquirers' proclivity to place risky investment bets on the growth potential of opaque targets. This pattern may partially explain frequent failures of mergers and acquisitions (M&A).

Role of institutional investors in reviving loss-making firms: evidence from India

PurposeThe present study aims to verify whether there is a positive (negative) role being played by the institutional investors on the loss-making companies' performance.Design/methodology/approachThe authors employ panel data regression and two-step system generalised method of moments (SYS-GMM) to test the above objective.FindingsThe empirical results clearly show that no positive relation is found between institutional investors and loss-making companies' performance.Research limitations/implicationsThe findings of the study might have significant implications for firms to improve the firms' operational performance [return on assets (ROA)]. Also, the firm's financial performance [return on equity (ROE)] could be improved by increasing profitability which will reflect in the share prices of the firms whereby the performance can build the investors' confidence over the firm. Market performance (Tobin's Q) could be increased by providing more attractive offers and discounts to customers to capture the business opportunities available in the market.Practical implicationsThe overall findings might have for reaching implications in the manufacturing sector with regard to allowing (disallowing) institutional investors.Social implicationsThe results of the study may help both companies and institutional investors.Originality/valueThis is the maiden attempt to study whether loss-making companies could be positively (negatively) impacted by the arrival of sophisticated institutional investors [foreign institutional investors (FIIs) and domestic institutional investors (DIIs)]. Further, this study is largely different from previous studies in terms of using new variables which are related to firm characteristics and valuation multiples. Further, seeing if the institutional investors tend to enhance the firm performance is curious.

Which multiples matter in M &A? An overview

This paper provides an overview of valuation multiples in mergers and acquisitions advisory. I review the literature and legal controversies and the theoretical basis for their role. I then standardize all the advisor multiples available in SDC Platinum along four dimensions and report rich descriptive statistics on each dimension over time and across industries. I highlight eight findings that are notable in light of current knowledge and debates. This paper answers the call from Gow et al. (Journal of Accounting Research 54(2):477–523, 2016) for thorough descriptive research, to provide a foundation and prompts for future hypothesis development. It includes an explicit guide for using this data, an overview of the key institutional details, and a discussion of tractable and open research questions.

A Financial Analysis for Tesla Based on the Multiple Valuation

After introducing the current state of the industry in which Tesla operates and the current situation and challenges faced by the Tesla company itself in the industry, this paper will interpret and analyze Tesla's success path and business model based on various aspects such as financial performance, competitors' situation, industry trends and local policies. In addition, the paper includes the profitability, activity, liquidity, solvency, and business valuation of Tesla's operating model. After analyzing Tesla's dilemmas and solutions in relation to its production model and competitors, it can be concluded that Tesla's future growth potential is significant until there is any unpredicted change in regional policy. The purpose of this paper is to explore the business model analysis done by combining basic data, financial report analysis, financial analysis model, and business analysis model. An attempt is made to extrapolate the results of a fair, complete, and thorough business model analysis in conjunction with the reality of the situation.

Analysis and Valuation of Toyota’s— Multiple Valuation Method of PE Ratio and EV EBITDA Ratio

With the continuous development of the automobile industry, Toyota has become the world's largest multinational automobile manufacturer. By referring to Toyota's 2019-2022 financial report and comprehensive report, this paper analyzes the company's business strategy and investment strategy and makes a relevant financial analysis. This paper mainly uses two methods of value assessment. The first method is EBITDA/EV, which is also considered an enterprise value multiple valuation model. The second is the price-earnings ratio valuation, which can be used to determine whether a company is overvalued or undervalued in the market. Based on the above analysis, the author believes that Toyota is overvalued, but it is relatively safe for investors based on its excellent operating performance and its leading position in the industry. At the same time, the author also expounds on the influence of Toyota's overvaluation on future development and emphasizes Toyota's current competitive advantages and potential market threats. Furthermore, since Toyota has undergone great changes in recent years and there are few types of research on Toyota from 2021 to 2022, the research significance of this paper is to help readers better grasp the recent financial status, business strategy, and enterprise value of Toyota.

NVIDIA's Operating Strategy Analysis Based on Multiple Valuation Method and SWOT

In recent years, due to the influence of technological development, epidemic situation and international situation, the development of the semiconductor industry has both risks and opportunities. Compared with other semiconductor companies, NVIDIA's share price and corporate value are at a high level. This raises several questions: is the value of NVIDIA fair? Under such circumstances, what competitive advantages does it have and what strategic choices will it make? This paper will use two multiples valuation methods to evaluate NVIDIA. Through the SWOT method, the paper puts forward suggestions for the development of NVIDIA. The conclusion is that NVIDIA is overvalued, and the five pieces of advice are to transform the supply chain in Gaming market, tilt resources towards the data center, expand the business volume in the field of artificial intelligence and self-driving cars, open new segments and reduce overlap with strong competitors and maintain a good relationship with chip foundries. These suggestions are of certain reference significance to semiconductor enterprises with scientific and technological advantages.

Ferrari Analysis Based on Multiples Valuation Method

In recent years, with the development of World multi-polarization and the impact of the COVID-19 epidemic on the economy, Economic Globalization and Trade Protectionism parallel. In this case, a world-famous cars manufacturing company, Ferrari, which provides luxury sports cars and racing cars, is facing a tough situation with the instability of its share price. Thus, an accurate evaluation of Ferrari's value appears essential. Based on this, this paper uses the multiples valuation method to evaluate Ferrari Company and will show whether Ferrari is under-valued, over-valued, or fair. And the authors choose several peer-comparable companies of the same type to provide an informative reference point, which can help to determine its value situation more accurately, and focus on P/E ratio and EV/EBITDA, then verify its actual valuation. The investigation shows that investors overvalued the share price of Ferrari and creditors overvalued the EV of Ferrari at the same time. At the end of the paper, some preliminary suggestions about Ferrari's sustainable development are given. The methods used are conducive to evaluating Ferrari's value more accurately, and the showed results can help investors and investigators get more exact information about Ferrari's current situation and future prospects to make more reasonable investment decisions.

Research and Application of Company Valuation Methods

The idea of company valuation originated from Irving Fisher's financial budget theory. The MM theory of American scholars F.Modigliani and Merton H.Miller marks the emergence of valuation theory in the modern sense. This paper mainly studies the theory and application of two company valuation methods—relative valuation method and absolute valuation method. It can be concluded from the research that the essence of valuation methods is the discounted valuation of future cash flows. In the case of stable performance, the price-earnings ratio P/E relative valuation method is the most intuitive. At various stages of development, the same company uses various valuation methodologies. The valuation approach should be modified in accordance with the company's current position. In addition, there is some subjectivity involved in valuing something because there is no universally accepted method. The significance of this research lies in valuation methods have their own advantages and limitations, and they have different emphases. Multiple valuation methods can be used for a comprehensive comparison.

MEASURING VALUATION UNCERTAINTY: A PCA APPROACH

Determining which companies are more difficult to value is a topic of significant interest in finance. Prior studies have employed many univariate proxies for valuation uncertainty to classify firms into high- and low-valuation uncertainty groups. In this study, I employ principal component analysis (PCA), a dimensionality reduction technique, using 11 valuation uncertainty proxies to extract the valuation uncertainty latent factor contained in the first principal component, which is proposed as a new measure of a firm’s valuation uncertainty, and show that it accurately captures a firm’s valuation uncertainty. I contend that using a PCA-derived valuation uncertainty index offers two benefits. First, integrating multiple valuation uncertainty proxies into a single metric improves our ability to quantify a firm’s valuation uncertainty. Second, it can assist in identifying the proxies that are most useful in measuring a firm’s valuation uncertainty.

Earning Alpha by Avoiding the Index Rebalancing Crowd

Traditional capitalization-weighted indices generally add stocks with high valuation multiples after persistent outperformance and sell stocks at low valuation multiples after persistent underperformance. It is well known that the price impact of these changes can be large once a change is announced. The subsequent reversal is less well known. For example, in the year after a change in the S&P 500 Index, discretionary deletions beat additions by 22%, on average. Simple rules, such as trading ahead of index funds or delaying reconstitution trades by 3 to 12 months, can add up to 23 basis points a year. This benefit roughly doubles when we cap-weight a portfolio selected based on the fundamental size of a company’s business or on its multi-year average market-cap.

Economic valuation of ecosystem services in Balatin River Sub-Watershed, Southern Philippines

Purpose. The study aimed to estimate the economic value of the ecosystem services provided by the Balatin River Sub-Watershed (BRSW) as a basis for policy recommendations focused on its conservation.
 Methodology / approach. The economic values were estimated through the Total Economic Value approach. To estimate the use values of the provision of water supply for households and irrigation use, the market price method and productivity method were used, respectively. Meta-analysis benefit transfer was used to estimate the non-use values.
 Results. An estimated 1,327,560 m3 of water is supplied to households every year with total revenue of PHP 20,626,441.20 per year. PHP 4,026,773.80 is generated annually to provide irrigation water. In addition, regulating services of the BRSW generate an amount of PHP 12,191,487.85 in 2021 price levels as a benefit for the residents. This generates an estimated total economic value of PHP 36,844,702.85 with benefits spread across the users in the community. The water for drinking benefits accrue to the residents whose water is supplied by the BRSW through the Wao Water District, the benefits of irrigation water are mostly received by farmers, and the benefits of regulating services accrue entirely to the residents within the BRSW and the surrounding communities.
 Originality / scientific novelty. This study was able to obtain a relatively higher estimated value by using multiple valuation methods in contrast to the conventional method of using a single approach. Additionally, the study contributes to addressing the limitation in existing literature particularly in the BRSW and the remaining sub-watersheds of Lanao del Sur which also suffer from degradation.
 Practical value / implications. The results of this study show that the BRSW is currently an indispensable resource for the municipality. The study is a first in the municipality and can therefore be used as an input in the appraisal of the watershed’s economic value. The estimated economic value generated by the watershed illustrates a portion of what has been neglected over the past decades as the deterioration of BRSW continues.