References (13)



Another Look at Equity and Enterprise Valuation Based on Multiples

Mingcherng Deng

City University of New York (CUNY) - Baruch College

Peter D. Easton

University of Notre Dame - Department of Accountancy

Julian Yeo

Columbia University - Accounting

April 2, 2012

We examine errors in enterprise and equity valuation based on multiples of firm fundamentals. Our study, which is based on a more representative sample (including firms with losses, smaller start up firms, etc.), complements extant studies, which are based on larger, profitable firms followed by analysts. Contrary to the results in the extant studies, we find that: (1) valuation errors for multiples based on sales are often lowest for both enterprise and equity value; and, (2) when we compare book value and earnings as valuation fundamentals, we find that book-value-based multiples outperform earnings-based multiples. Our focus is on multiples of current financial variables. We show vast improvement in valuation errors when an average omitted variable (intercept) is incorporated in the calculation of harmonic means. We extend the extant literature by demonstrating how harmonic means can be calculated when different multiples are combined, enabling us to examine the change in valuation errors when a combination of multiples is used instead of just a single multiple. Our results show that valuation errors are significantly improved when combining fundamentals from different financial statements; the largest improvement is observed when balance sheet fundamentals (net operating assets and book value of equity) are combined with fundamentals from the income statement (for example, EBITDA).

Number of Pages in PDF File: 45

Keywords: Valuation, Financial Statement Analysis, Multiples, Market Efficiency

JEL Classification: G12, M41

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Date posted: August 27, 2009 ; Last revised: April 5, 2012

Suggested Citation

Deng, Mingcherng and Easton, Peter D. and Yeo, Julian, Another Look at Equity and Enterprise Valuation Based on Multiples (April 2, 2012). Available at SSRN: http://ssrn.com/abstract=1462794 or http://dx.doi.org/10.2139/ssrn.1462794

Contact Information

Mingcherng Deng (Contact Author)
City University of New York (CUNY) - Baruch College ( email )
One Bernard Baruch Way, Box B12-225
New York, NY 10010
United States
Peter D. Easton
University of Notre Dame - Department of Accountancy ( email )
Mendoza College of Business
Notre Dame, IN 46556-5646
United States
574-631-6096 (Phone)
574-631-5127 (Fax)
Julian Yeo
Columbia University - Accounting ( email )
3022 Broadway
New York, NY 10027
United States

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