Price multiples based on forecasts and reported values of earnings, dividends, sales, and cash flows: an international comparison

Jing Liu
University of California, Los Angeles

Doron Nissim
Columbia University

Jacob K. Thomas
Columbia University

Abstract: We examine the ability of valuations based on industry price multiples to approximate observed stock prices in 10 countries. Our findings are as follows. First, multiples based on earnings perform the best, those based on sales perform the worst, and dividend and cash flow multiples exhibit intermediate performance. Second, using forecasts improves performance over reported numbers, with the greatest (smallest) improvement being observed for earnings (sales). The relatively poor performance of cash flow forecasts is surprising. Third, multiples based on earnings forecasts represent a reasonably accurate valuation technique, with the implied valuations for over half the firms in the different countries lying within 30 percent of observed prices. Fourth, across-country variation in performance converges over time. Finally, performance declines during the “bubble” of the late 1990’s. We identify interesting deviations from these general patterns, and link those deviations to institutional features specific to those industries and countries.

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