The Importance of Price Earnings Ratio in Equity Valuation on Stock Exchange Market

摘要

There are many methods used to value equity and companies. Most of them fail to give a realistic value to the firm being valuated. The most used technique is discounted cash flow method. Because of its weaknesses, the investors are using more and more another approach to rate companies. This is relative valuation. The essence of this methodology depends critically on two components: the multiple that is used and the comparables that are chosen. Depending on what multiple we use we may be able to determine the Value of Equity or the Global Value of Enterprise. This paper focuses on equity valuation using multiples. We present the methodology of valuing equity of a non- listed company with the purpose of establishing a share price for the first time on the stock exchange market. The multiple selected is price earnings ratio, calculated as a median for the peer group. The comparable companies are defined as being those who are listed on the stock exchange market in the same class as the company for which we want to find a share value. Further studies on the subject refer to other multiples used in relative valuation.