ISSN 2736-1721
Global Journal of Business Management ISSN 6731-4538 Vol. 5 (11), pp. 001-012, November, 2011. © International Scholars Journals
Full Length Research Paper
A South African perspective on the multiples of choice in the valuation of ordinary shareholders’ equity: From theory to practice
W. S. Nel
Department of Accounting, Stellenbosch University, Private Bag X1, Matieland 7602, South Africa. E-mail: [email protected]. Tel: 021-808 3430. Fax: 021-886 4176.
Accepted 18 May, 2011
Abstract
It is imperative that academic theory regarding investment and finance, and the application thereof in practice, are well aligned. If there is a gap between what academia advocates in their lecture halls and what investment practitioners apply in practice, this may suggest that there is a need to converge academic thinking regarding the use of multiples per se; and to narrow the gap between academia and investment practitioners. This paper investigates how well valuation theory regarding multiples, as advocated by academia, is aligned with the multiples that leading financial analysts and corporate financiers apply in practice. Although multiples are used extensively in practice as an equity valuation method, no study has yet compared the preferences of investment practitioners for certain multiples, with the multiples that academia advocates. The research results reveal that, although academia and investment practitioners favour the price earnings ratio and agree on the suitability of earnings and sales as value drivers; they disagree significantly with regard to other multiples and value drivers.
Key words: Equity valuation, multiples, price earnings ratio, price earnings growth ratio, cash flows, value drivers, market value of invested capital, earnings before interest, tax, depreciation and amortisation, earnings before interest and tax.