Relative Company-Valuation Methods and Lessons of the Global Financial Crisis

• Authors: Dimiter N. Nenkov

Abstracts

EN

The subject of this article is the use of relative valuation for estimating the value of companies and the risks associated with its application in Bulgaria. The focus is on the analysis of typical omissions and weaknesses characteristic of the practical application of widely used market ratios. Special attention has been put on some important requirements related to the correct interpretation of average market ratios. The definition, argumentation and usage of correct ratios require in-depth knowledge of their nature and of the fundamental factors which determine their values. With regard to this, a review of price-earnings and price-to-book value ratios on the Bulgarian capital market and analysis of the same ratios from the perspective of the reasonability of their levels has been made. Fundamental price-earnings and price-to-book value ratios have also been estimated and compared with the corresponding actual ratios on the Bulgarian Stock Exchange. The results of the study indicate that during the period prior to the financial crisis the average levels of the actual ratios on the Bulgarian capital market were considerably higher than the levels suggested by fundamentals.

Keywords

EN

company valuation; relative valuation; valuation models; price-earnings; price-to-book

• Publisher: Sciendo
• Journal: Issues of Business and Law
• Year: 2010
• Volume: 2
• Pages: 46-62

Contributors

author

Dimiter N. Nenkov

• Department of Finance, University of National and World Economy, Studentski Grad, 1700 Sofia, Bulgaria

References

• Block, E. (1995). A study of the price to book relationship.Financial Analysts Journal, January/February, 63-73. (Reprinted fromFinancial Analyst Journal, September/October, 1964).
• Bulgarian Stock Exchange. Retrieved December 19, 2009, fromhttp://www.bse-sofia.bg
• Copeland, T.; Koller, T.; Murrin, J. (2000).Valuation - Measuring and Managing the Value of Companies.New York: John Wiley & Sons, 201-226.
• Damodaran, A. (2002).Investment Valuation - Tools and Techniques for Determining the Value of Any Asset.New York: John Wiley & Sons, 164-180, 453, 455, 456, 459.
• Damodaran, A. (2008).September 12 to October 16 - Five Weeks from Hell and the Lessons we Have Learned.Retrieved December 10, 2008, fromhttp://pages.stern.nyu.edu/~adamodar
• Damodaran, A. (2009).Damodaran on Valuation.Retrieved November 12, 2009, fromhttp://pages.stern.nyu.edu/~adamodar/New_Home_Page/vall.htm
• Damodaran, A. (2010).Updated Data.Retrieved January 26, 2010, fromhttp://pages.stern.nyu.edu/~adamodar
• Financial Supervision Commission. (2005). Retrieved December 23, 2005, fromhttp://www.fsc.bg
• Nenkov, D. (2005).Ocenka na Investiciite v Realni Aktivi[Valuation of Investments in Real Assets]. Sofia: UI "Stopanstvo". (In Bulgarian)
• Nenkov, D. (2007a). Koeficientni metodi za opredelyane stojnostta na kompaniite. Sashtnost i osobenosti na koeficienta "cena-dohod" [Multiples Methods for Estimating the Value of Companies. Definition and Features of the Price-earnings Ratio]. InNauchni trudove na UNSS, II (pp. 243-285). Sofia: UI "Stopanstvo". (In Bulgarian)
• Nenkov, D. (2007b). Fakticheski i fundamentalni koeficienti "cena-dohod" na balgarskia kapitalov pazar [Actual and Fundamental Ratios on the Bulgarian Capital Market].Ikonomicheska Misal, 6, 23-44. (In Bulgarian)
• Nenkov, D.; Bathala, C. (2008). Price-Earnings Ratios on the Bulgarian Capital Market: An Analytical Approach to Comparing Actual Vs. Fundamental P/E Ratios. InGlobalization: Opportunities & Challenges(pp. 347-366). Delhi: Wisdom Publications.
• McTaggart, J. M.; Kontes, P. W.; Mankins, M. C. (1994).The Value Imperative - Managing for Superior Shareholder Returns.New York: The Free Press.
• Molodovsky, N. (1953). A theory of price-earnings ratios.Financial Analysts Journal, January/February, 1995, 29-43 (Reprinted fromAnalyst Journal, November 1953).
• Reilly, F. K.; Brown, K. C. (2003).Investment Analysis - Portfolio Management.New York: Thomson Learning, 466, 578.
• Stankevičienė, E. (2009). Real estate investment optimal portfolio selection: a case study of European countries.Issues of Business and Law, 1, 1-9. Vilnius: VTVK. doi:10.2478/v10088-009-0001-1
• Stickney, C. P. (1996).Financial Reporting and Statement Analysis.New York: The Dryden Press.
• Value Line & Bloomberg. Retrieved March 9, 2009, fromhttp://pages.stern.nyu.edu/~adamodar
• Yordanov, M. (2006).Sedem izgubeni godini za amerikanskite i evropejskite akcii[Seven Lost Years for the American and European Shares]. Retrieved June 5, 2007, fromhttp://www.investor.bg

Identifiers

DOI

10.2478/v10088-010-0005-x