A Note on a Framework for Valuation Ratios Based on Fundamentals

Abstract

Valuation ratios divide stock price by accounting metrics such as earnings, earnings growth and book value. This study adapts the general valuation framework in Ohlson and Juettner-Nauroth (2005) and Ohlson (2005) to present a unified approach for developing valuation ratios based on fundamentals, referred to as fundamental valuation ratios. One starts with a valuation model that is driven by an accounting metric a and its abnormal growth, then divides the valuation model by a to get a fundamental valuation ratio. For any valuation ratio, one can find a corresponding fundamental valuation ratio, as long as the valuation model is based on the same metric a as the valuation ratio denominator.

Keywords: Fundamentals, Growth, Ratios, Valuation

JEL Classification: G12, G14, M40, M41