WP n. 14 - The Valuation by Multiples of Italian Firms

The purpose of this paper is twofold. Firstly, to test a sample of companies listed on the Milan stock exchange from 2000 to 2006, which comparables selection method generates the most precise forecasts when appraising with price/earnings, price/book value, price/sales, enterprise value/EBIT and enterprise value/FCF multiples. Comparables firms are selected by activity sector, sector and size, sector and ROA, ROA and size and averaging with the arithmetic mean, median and harmonic mean, therefore twelve multiple valuation methods are analyzed. The empirical results suggest that valuation with a selection of comparables firms on the basis of sector and ROA or sector and size is more accurate; moreover, valuation improves when multiples are averaged using median relative to arithmetic and harmonic mean. Secondly, to test the effectiveness of the main multiples (price/earnings, price/book value, price/sales, enterprise value/sales, enterprise value/book value, enterprise value/EBIT, enterprise value/EBITDA, enterprise value/free cash flow) in determining company value. We also analyze how factors such as sector, size and year bias these outcomes. The results show that the multiples based on cash flows are almost always significant; the multiples based on earnings are more significant in industrial sectors and in particular for small firms and with many intangible assets; the multiples on book value appear more effective for non-industrial firms.