inconsistencydoesnotmattersincethemultipleiscomputed
thesamewayforallofthecomparablefirms;buttheywould
bewrong.Ifsomefirmsonthelisthavenodebtandothers
carrysignificantamountsofdebt,thelatterwilllookcheapon
a price-to-EBITDA basis, when in fact they might be
overpriced or correctly priced.
Uniformity
Inrelativevaluation,themultipleiscomputedforallofthe
firms in a group and thencompared across thesefirms to
makejudgmentsonwhichfirmsareoverpricedandwhichare
underpriced. For this comparison to have any merit, the
multiplehastobedefineduniformlyacrossallofthefirmsin
thegroup.Thus,ifthetrailingP/Eisusedforonefirm,ithas
tobe usedforalloftheothers aswell.In fact,oneofthe
problemswithusingthecurrentP/E tocomparefirms ina
group isthat different firms can havedifferent fiscal year
ends.Thiscanleadtosomefirmshavingtheirpricesdivided
byearningsfrom JulytoJune oftheprioryearwith other
firmshavingtheirpricesdividedbyearningsfromJanuaryto
December of thesame year.While the differences canbe
minor in mature sectors, where earnings do not make
quantum jumps over six months, they can be large in
high-growth sectors.
Withbothearningsandbookvaluemeasures,thereisanother
componenttobeconcernedabout,andthatistheaccounting
standards used to estimate earnings and book values.
Differences in accounting standards can result in very
differentearningsandbookvaluenumbersforsimilarfirms.
Thismakescomparisonsofmultiplesacrossfirmsindifferent
markets,with different accountingstandards,very difficult.