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

Multiple Fundamental Determinants

Price-to-sales ratio

Expected growth, payout, risk, net

margin

Itispossible,however,thattheproxiesthatweuseforrisk
(beta),growth(expectedgrowthrateinearningspershare),
and cash flow (payout) may be imperfect and that the
relationshipmaynotbelinear.Todealwiththeselimitations,
wecanaddmorevariablestotheregression(e.g.,thesizeof
the firm may operate as a good proxy for risk).

The first advantage of this marketwideapproach over the
subjective comparison across firms in the same sector,
described in the previous section, is that it does quantify,
based on actual market data, the degree to which higher
growthorriskshouldaffectthemultiples.Itistruethatthese
estimatescancontainerrors,butthoseerrorsareareflection
oftherealitythatmanyanalystschoosenottofacewhenthey
makesubjectivejudgments.Second,bylookingatallfirmsin
themarket,thisapproachallowsustomakemoremeaningful
comparisonsoffirmsthatoperateinindustrieswithrelatively
fewfirms.Third,itallowsustoexaminewhetherallfirmsin
an industry are under- or overvalued by estimating their
values relative to other firms in the market.

Limitations of Statistical Techniques

Statisticaltechniquesarenotapanaceafortheproblemswe
run into when doing analysis. They are tools that every
analystshouldhaveaccessto,buttheyshouldremaintools.In
particular,whenapplyingregressiontechniquestomultiples,
weneedtobeawareofboththedistributionalpropertiesof
multiplesthatwetalkedaboutearlierinthechapterandthe