Damodaran on Valuation_ Security Analysis for Investment and Corporate Finance ( PDFDrive )

by using theone multiple thatis best suited forthe firm.
There are three ways in which we can find this multiple.

1.Thefundamentalsapproach.Weshouldconsiderusingthe
variablethatismosthighlycorrelatedwiththefirm’svalue.
For instance, current earnings and value are much more
highly correlated in consumer product companies than in
cyclicalcompanies.Usingprice-earningsratiosmakesmore
sense for the former than for the latter.

2.Thestatisticalapproach.Wecouldrunregressionsofeach
multipleagainstthefundamentalsthatwedeterminedaffected
the value of the multiple and use the R-squared of the
regressionasameasureofhowwellthatmultipleworksin
thesector. Themultiple with the highestR-squared is the
multiple that we can best explain using fundamentalsand
should be themultiple we use to valuecompanies in that
sector.

3.Theconventionalmultipleapproach.Overtime,weusually
seeaspecificmultiplebecomethemostwidelyusedonefora
specific sector. Forinstance, theprice-to-sales ratio is the
most commonly usedmultipleto analyzeretailcompanies.
Table 18.1summarizes the mostwidely usedmultiples by
sector.

TABLE 18.1Most Widely Used Multiples by Sector

Sector

Multiple

Used

Rationale/Comments