Performances of Multiples and Methods for Selecting Guidelines Companies - Empirical Evidences on Bucharest Stock Exchange

Valuation using multiples represents the most frequently used method in the equity valuation practice. The main reason for this popularity is the simplicity in application. However, for obtaining high valuation performances, it must be taken into consideration some aspects at the implementation of the method, among which the choosing of the selection method for guidelines companies and the multiple used is crucial. The analysis performed based on the data for company listed on Bucharest Stock Exchange (BSE) during the period 2004 - 2008 has revealed that the methods for selecting guidelines companies which takes into consideration return on equity (ROE) as control factor lead to the highest valuation performances. When selecting guidelines companies on the basis of ROE, the P/E, P/B, P/CF and P/TA multiples determine superior performances compared to those of the P/S, EV/EBIT and EV/EBITDA multiples. The analysis of the multiples' accuracy when using the selection method based on the industry membership revealed that the multiples based on cash flows, P/CF and EV/EBITDA, leads to the highest valuation performances.