The valuation performance of mathematically-optimised, equity-based composite multiples

Authors

  • Soon Nel Department of Accountancy, Stellenbosch University, Stellenbosch, South Africa
  • Niël le Roux Department of Statistics and Actuarial Science, Stellenbosch University, Matieland, South Africa

Keywords:

Emerging markets, Composite multiples, Equity multiples, Equity valuations, Valuation precision

Abstract

Purpose. This paper aims to examine the valuation precision of composite models in each of six key industries in South Africa. The objective is to ascertain whether equity-based composite multiples models produce more accurate equity valuations than optimal equity-based, single-factor multiples models.

Design/methodology/approach. This study applied principal component regression and various mathematical optimisation methods to test the valuation precision of equity-based composite multiples models vis-à-vis equity-based, single-factor multiples models.

Findings. The findings confirmed that equity-based composite multiples models consistently produced valuations that were substantially more accurate than those of single-factor multiples models for the period between 2001 and 2010. The research results indicated that composite models produced up to 67 per cent more accurate valuations than single-factor multiples models for the period between 2001 and 2010, which represents a substantial gain in valuation precision.

Research implications. The evidence, therefore, suggests that equity-based composite modelling may offer substantial gains in valuation precision over single-factor multiples modelling.

Practical implications. In light of the fact that analysts’ reports typically contain various different multiples, it seems prudent to consider the inclusion of composite models as a more accurate alternative.

Originality/value. This study adds to the existing body of knowledge on the multiples-based approach to equity valuations by presenting composite modelling as a more accurate alternative to the conventional single-factor, multiples-based modelling approach.

Doi: https://doi.org/10.1108/JEFAS-02-2017-0042

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Published

2017-12-01

How to Cite

Nel, S. ., & le Roux, N. . (2017). The valuation performance of mathematically-optimised, equity-based composite multiples. Journal of Economics, Finance and Administrative Science, 22(43), 224–250. Retrieved from https://revistas.esan.edu.pe/index.php/jefas/article/view/123