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

multipleinTable8.12.Notethatthecompanionvariablefor
eachmultipleisitalicizedinthetable.Attheminimum,we
would expect analysts to control forat least this variable.
However,theothervariablescontinuetoaffectmultiples,and
assumptions,bothexplicitandimplicit,aboutthesevariables
can determine what looks cheap or expensive.

TABLE 8.12Equity Multiples and Fundamentals

Multiple UsedFundamental Determinants

P/E Payout ratio,expected growth, equity risk

PEG Payout ratio, expected growth,equity risk

Price/FCFE Risk,expected growth

Price/BV of

equity

Payout ratio, expected growth, equity risk,

return on equity

Price/sales

Payout ratio, expected growth, equity risk,

net margin

Thebestwaytoseethebiasescreatedbynotcontrollingfor
all of the variables that affect multiples is by looking at
relative valuations done across sectors. In the four
illustrations that follow, we examine the use of equity
multiples and different ways of controlling for the
fundamentals.

ILLUSTRATION 8.2: Comparing PE across Software
Companies

Thefollowing table summarizes the trailingP/E ratios for
software firmslisted intheUnitedStatesin January 2006.
Theearningspersharenumbersusedareestimatedoverthe