Analyzing Valuation Measures: A Performance Horse-Race Over the Past 40 Years
Wesley R. Gray
Alpha Architect; Drexel University - LeBow College of Business
Alpha Architect; Drexel University
March 29, 2012
Journalof Portfolio Management, Forthcoming
We compare the investment performance of portfolios sorted on different valuation measures. EBITDA/TEV has historically been the best performing metric and outperforms many investor favorites such as price-to-earnings, free-cash-flow to total enterprise value, and book-to-market. We also explore the investment potential of long-term valuation ratios, which replace one-year earnings with an average of long-term earnings. In contrast to prior empirical work, we find that long-term ratios add little investment value over standard one-year valuation metrics.
Keywords: enterprise multiple, price to earnings, price to book, free cash flow, gross profits, valuation metrics
JEL Classification: G10, G14
Date posted: December 13, 2011 ; Last revised: October 1, 2012
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