Rationales for the usage of price multiples in equity valuation
Posted by ~Ray @ 2007-10-17 14:24:35
If you are investor and you read the analyst inform you may query why they used price multiples such as P/E. P/BV. P/S and P/CF ratios in equity valuation. come up. I undergo consolidated the rationales and their drawbacks here. Hope you find them useful. Rationales for using price-to-earnings (P/E) ratios in valuation:
Different accounting conventions can obscure the true investment in the tighten made by shareholders which reduces the comparability of P/BV ratios across firms and countries. For example research and development costs (R&D) are expensed in the U. S. which can understate investment and misinform income over time.
Inflation and technological dress can create the book and market determine of assets to differ significantly so book value is not an accurate measure of the determine of the shareholders' investment. This makes it more difficult to compare P/BV ratios across firms.
While less subject to distortion than earnings or cashflows revenue recognition practices can still distort sales forecasts. For example analysts should look for company practices that speed up revenue recognition. An example is sales on a bill-and-hold basis which involves selling products and delivering them at a later go out. This practice accelerates sales into an earlier reporting period and distorts the P/S ratio.[ADVERTHERE]Related article:
http://neaven-seo.blogspot.com/2007/10/rationales-for-usage-of-price-multiples.html
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