Relative Valuation

Comparable Firm Approach

Also called as the relative approach

The value of the firm is derived from type value of

comparable firms , based on a set of common variables
like earnings, sales, cash flows, book value etc.

The most common method of valuing equity is by using

P/E multiple.

The steps involves

Analysis of the firm
Identification of comparable firms
Comparison & Analysis
Valuation of firm

Determinants of Multiples

Finding comparable assets that are priced by the

market

Scaling the market prices to a common variable to

generate standardized prices that are comparable

Adjust for differences across assets

PROS AND CONS OF RELATIVE VALUATION

Use of multiples and comparables is less time

consuming and resource intensive

Easier for analysts to justify

Factors market imperatives

Useful for stock valuation

Earnings Multiples
Price/Earnings

Ratio (PE) and variants (PEG and Relative PE)

Value/EBIT
Value/EBITDA
Value/Cash

Flow

Book Value Multiples

Price/Book
Value/

Value(of Equity) (PBV)

Book Value of Assets

Value/Replacement

Cost (Tobins Q)

Revenues
Price/Sales
Value/Sales

per Share (PS)

PE = Market Price per Share / Earnings per Share

There are a number of variants on the basic PE ratio

in use. They are based upon how the price and the
earnings are defined.

Price: is usually the current price

is sometimes the average price for the year

EPS:
year

earnings per share in most recent financial

earnings per share in trailing 12 months (Trailing

PE)
forecasted earnings per share next year
(Forward PE)
forecasted earnings per share in future year

PEG Ratio

The PEG ratio is the ratio of price earnings to

expected growth in earnings per share.
PEG = PE / Expected Growth Rate in Earnings

The relative PE ratio of a firm is the ratio of the PE

of the firm to the PE of the market.
Relative PE = P E of Firm / PE of Market

Value/Earnings and Value/Cash flow

Ratios
Value/FCFF =
(Market Value of Equity + Market Value of Debt-Cash)
EBIT (1-t) - (Cap Ex - Deprecn) - Chg in WC

Value/EBIT

Value/EBIT(1-t)

Value/FCFF

Value/EBITDA

Value/EBITDA Multiples

The multiple of value to EBITDA varies widely across

firms in the market, depending upon:
how

capital intensive the firm is (high capital intensity

firms will tend to have lower value/EBITDA ratios),

how much reinvestment is needed to keep the business

going and create growth

how

high or low the cost of capital is (higher costs of

capital will lead to lower Value/EBITDA multiples)

how

high or low expected growth is in the sector (high

growth sectors will tend to have higher Value/EBITDA
multiples)

The multiple can be computed even for firms that are reporting net
losses, since earnings before interest, taxes and depreciation are
usually positive.
2. For firms in certain industries, such as cellular, which require a
substantial investment in infrastructure and long gestation periods,
this multiple seems to be more appropriate than the price/earnings
ratio.
3. In leveraged buyouts, where the key factor is cash generated by
the firm prior to all discretionary expenditures, the EBITDA is the
appropriate tool.
4. By looking at measure of cash flows from operations that can be
used to support debt payment at least in the short term.
5. By looking at cash flows prior to capital expenditures, it may
provide a better estimate of optimal value, especially if the
capital expenditures he value of the firm and cash flows to the
firm it allows for comparisons across firms with different financial
leverage.

PRICE/BOOK VALUE

The Price/Book value ratio is the ratio of the market

value of equity to the book value of equity, i.e., the
measure of shareholders equity in the balance
sheet.

Price/Book Value =

Market Value of Equity

Book Value of Equity

Adjusted book value approach

The steps involved:

Valuation of Tangible Assets

Valuation of Intangible Assets

Valuation of Liabilities

WHEN PRICE/BOOK VALUE IS USED

Book value provides a relatively stable, intuitive

measure of value that can be compared to the
market price

Given reasonably consistent accounting standards

across firms, price-book value ratios can be
compared across similar firms for signs of under or
over valuation

Firms with negative earnings, which cannot be

valued using price-earnings ratios, can be evaluated

Price/Book Value Not Feasible

Book values, like earnings, are affected by

accounting decisions on depreciation and other
variables.

Book value may not carry much meaning for

technology firms which do not have significant
tangible assets.

The book value of equity can become negative if a

firm has a sustained string of negative earnings
reports, leading to a negative price-book value ratio.

How to treat options outstanding to equity value

Impact of buybacks and acquisitions

Financial Factors
The value of the firm depends on the following three factors

Return on Equity

Cost of Equity

Growth Rate

The constant dividend discount model says that

P0= d1/k-g
Also,DPS1 = (EPS1)(Payout ratio), P0=EPS *(PAYOUT
RATIO)/k-g
Defining ROE=EPS/Book value of equity
Substituting d1,
P0=B*roe*b/k-g
Dividing both sides by B
P0/B=r*b/k-g
Also,
g=r(1-b)
ROE*b=r-g
Replacing r*b,
P0/B=r-g/k-g

P0/B=r-g/k-g
Thus,

a firms market to book value ratio can be derived from

its return on equity, its cost on equity and its growth rate.
In order to create value for its shareholders, a firm should
have positive spread between the return on equity & cost of
equity, and high growth rate

TOBINS Q

Tobins Q is a practical measure of value for a mature

firm with most or all of its assets in place, where
replacement cost can be estimated for the assets.

Tobins Q is more a measure of the perceived quality of

a firms management with poorly managed firms trading
at market values that are lower than the replacement
cost of the assets that they own

Firms with low Tobin's Q are more likely to be taken

over for purposes of restructuring and increasing value.

Shareholders of high q bidders gain significantly more

from successful tender offers than shareholders of low q

bidders.

PRICE/SALES
Determined by
(a) Net Profit Margin: Net Income / Revenues. The price-sales ratio is
an increasing function of the net profit margin. Firms with higher
net margins, other things remaining equal, should trade at higher
price to sales ratios.
(b) Payout ratio during the high growth period and in the stable
period: The PS ratio increases as the payout ratio increases, for any
given growth rate.
(c) Riskiness (through the discount rate ke,g in the high growth period
and ke,st in the stable period): The PS ratio becomes lower as
riskiness increases, since higher risk translates into a higher cost of
equity.
(d) Expected growth rate in Earnings, in both the high growth and
stable phases: The PS increases as the growth rate increases, in
both the high growth and stable growth period.

PRICE SALES RATIOS

The price/sales ratio of a stable growth firm
can be estimated beginning with a 2-stage
equity valuation model:
P0

DPS1
r gn

Dividing both sides by the sales per

share:
P0
Sales 0

PS =

Net Profit M argin* Payout Ratio*(1 g n )

r-gn

Compute the value of sigma Ltd. using the comparable

approach using the following information:
Sales
Rs.100cr
PAT
Rs.15cr
Book Value Rs.60cr
Weightages 50% to earnings,25% to sales & book value

each
Information of comparable firms:
Particulars
A Ltd.
B Ltd.
Sales
80
120
PAT
12
18
Book value
40
90
Market value
120
150

C Ltd.
150
25
100
240

Particulars
Price /Sales ratio
Price/Earning ratio
Price/book value

A B
C Avg.
1.50 1.25 1.60 1.45
10.00 8.33 9.60 9.31
3.00 1.66 2.40 2.35

Applying the above multiples, the value of sigma is

as follows:
Particulars
Multiples Parameter Value
Price /Sales
1.45
100
145.00
Price/Earning
9.31
15
139.65
Price/book value
2.35
60
141.00
Value of the firm:
(145.00*1)+(139.65*2)+(141.00*1)/4 = 141.32

ADVANTAGES OF RELATIVE VALUATION

Relative valuation is much more likely to reflect market

perceptions and moods than discounted cash flow valuation.
This can be an advantage when it is important that the price
reflect these perceptions as is the case when the objective is
to sell a security at that price today (as in the case of an IPO)
investing on momentum based strategies

With relative valuation, there will always be a significant

proportion of securities that are under valued and over
valued.

Since portfolio managers are judged based upon how they

perform on a relative basis (to the market and other money
managers), relative valuation is more tailored to their needs

Relative valuation generally requires less information than

discounted cash flow valuation (especially when multiples are
used as screens)

DISADVANTAGES OF RELATIVE VALUATION

A portfolio that is composed of stocks which are under valued on a
relative basis may still be overvalued, even if the analysts judgments
are right. It is just less overvalued than other securities in the
market.
Relative valuation is built on the assumption that markets are
correct
in the aggregate, but make mistakes on individual securities. To the
degree that markets can be over or under valued in the aggregate,
relative valuation will fail
Relative valuation may require less information in the way in which
most analysts and portfolio managers use it. However, this is because
implicit assumptions are made about other variables (that would have
been required in a discounted cash flow valuation). To the extent that
these implicit assumptions are wrong the relative valuation will also
be wrong.

PE Ratio: Understanding the Fundamentals

To understand the fundamentals, start with a basic equity

discounted cash flow model.

With the dividend discount model,

P0

DPS1
r gn

Dividing both sides by the earnings per share,

P0
Payout Ratio* (1 g n )
PE =
EPS 0
r-gn

If this had been a FCFE Model,

P0

FCFE1
r gn

P0
(FCFE/Earnings) * (1 g n )
PE =
EPS0
r-g n

PE Ratio and Fundamentals

Proposition: Other things held equal, higher growth firms

will have higher PE ratios than lower growth firms.

Proposition: Other things held equal, higher risk firms will

have lower PE ratios than lower risk firms

Proposition: Other things held equal, firms with lower

reinvestment needs will have higher PE ratios than firms
with higher reinvestment rates.

A Simple Example

Assume that you have been asked to estimate the PE

ratio for a firm which has the following characteristics:

Variable

High Growth Phase

Expected Growth Rate 25%

Stable
Growth
8%

Payout Ratio

20%

50%

Beta

1.00

1.00

Riskfree rate = T.Bond Rate = 6%

Required rate of return = 6% + 1(5.5%)= 11.5%

(1.25)5

0.2 * (1.25) * 1
5
(1.115) 0.5 * (1.25)5 * (1.08)
PE =
+
= 28.75
5
(.115 - .25)
(.115-.08) (1.115)

Using comparable firms- Pros and Cons

The most common approach to estimating the PE ratio for a firm is

to

choose a group of comparable firms,

to

calculate the average PE ratio for this group and

to

subjectively adjust this average for differences between the firm

being valued and the comparable firms.

Problems with this approach.

The

definition of a 'comparable' firm is essentially a subjective

one.
The

use of other firms in the industry as the control group is often

not a solution because firms within the same industry can have
very different business mixes and risk and growth profiles.

There
Even

is also plenty of potential for bias.

when a legitimate group of comparable firms can be

constructed, differences will continue to persist in fundamentals

Using the entire cross section: A regression approach

In contrast to the 'comparable firm' approach, the information

in the entire cross-section of firms can be used to predict PE
ratios.

The simplest way of summarizing this information is with a

multiple regression, with the PE ratio as the dependent
variable, and proxies for risk, growth and payout forming the
independent variables.

Problems with the regression methodology

The basic regression assumes a linear relationship between

PE ratios and the financial proxies, and that might not be
appropriate.

The basic relationship between PE ratios and financial

variables itself might not be stable, and if it shifts from year to
year, the predictions from the model may not be reliable.

The independent variables are correlated with each other. For

example, high growth firms tend to have high risk. This multicolinearity makes the coefficients of the regressions
unreliable and may explain the large changes in these
coefficients from period to period.

Investment Strategies that compare PE to the expected growth

rate

If we assume that all firms within a sector have similar growth

rates and risk, a strategy of picking the lowest PE ratio stock in
each sector will yield undervalued stocks.

Portfolio managers and analysts sometimes compare PE ratios to

the expected growth rate to identify under and overvalued stocks.
In

the simplest form of this approach, firms with PE ratios

less than their expected growth rate are viewed as
undervalued.

In

its more general form, the ratio of PE ratio to growth is

used as a measure of relative value.

PEG Ratio: Definition

The PEG ratio is the ratio of price earnings to expected growth in earnings per share.
PEG = PE / Expected Growth Rate in Earnings

This measure helps in identifying undervalued and overvalued stocks.

Commonly used in technology firms.

Definitional tests:

Is the growth rate used to compute the PEG ratio

on

the same base? (base year EPS)

over

the same period?(2 years, 5 years)

from

the same source? (analyst projections, consensus estimates..)

Is the earnings used to compute the PE ratio consistent with the growth rate
estimate?
No

double counting: If the estimate of growth in earnings per share is from

the current year, it would be a mistake to use forward EPS in computing PE

If

looking at foreign stocks or ADRs, is the earnings used for the PE ratio
consistent with the growth rate estimate? (US analysts use the ADR EPS)

PEG Ratio: Analysis

P0 =

To understand the fundamentals that determine PEG

ratios, let us return again to a 2-stage equity discounted
cash flow model
(1+ g) n
EPS0 * Payout Ratio*(1+ g) * 1
(1+ r) n
r-g

EPS0 * Payout Ration *(1+ g) n *(1+ g n )

+
(r -g n )(1+ r)n

Dividing both sides of the equation by the earnings gives

us the equation for the PE ratio. Dividing it again by the
expected growth g

PEG =

(1+ g) n
Payout Ratio*(1 + g) * 1
(1 + r) n
g(r - g)

Payout Ration * (1+ g) * (1+ g n )

+
g(r - gn )(1 + r)n

PEG Ratios and Fundamentals: Propositions

Proposition 1: High risk companies will trade at much lower PEG ratios than
low risk companies with the same expected growth rate.

Proposition 2: Companies that can attain growth more efficiently by investing

less in better return projects will have higher PEG ratios than companies that
grow at the same rate less efficiently.

Corollary 1: The company that looks most under valued on a PEG ratio
basis in a sector may be the riskiest firm in the sector

Corollary 2: Companies that look cheap on a PEG ratio basis may be

companies with high reinvestment rates and poor project returns.

Proposition 3: Companies with very low or very high growth rates will tend to
have higher PEG ratios than firms with average growth rates. This bias is
worse for low growth stocks.

Corollary 3: PEG ratios do not neutralize the growth effect.

Relative PE: Definition

The relative PE ratio of a firm is the ratio of the PE of the

firm to the PE of the market.
Relative PE = PE of Firm / PE of Market

While the PE can be defined in terms of current earnings,

trailing earnings or forward earnings, consistency requires
that it be estimated using the same measure of earnings for
both the firm and the market.

Relative PE ratios are usually compared over time. Thus, a

firm or sector which has historically traded at half the market
PE (Relative PE = 0.5) is considered over valued if it is
trading at a relative PE of 0.7.

Relative PE: Determinants

To analyze the determinants of the relative PE ratios, let

us revisit the discounted cash flow model we developed
for the PE ratio. Using the 2-stage DDM model as our
basis (replacing the payout ratio with the FCFE/Earnings
Ratio, if necessary), we get

(1+ g j )n

Payout Ratioj *(1 + g j ) * 1

n
n
(1+ rj )

Payout Ratioj,n *(1 + g j ) *(1 + g j,n )

+
rj - g j
(rj - g j,n )(1 + rj )n
Relative PE j =

(1+ g m ) n

Payout Ratiom * (1+ g m )* 1

(1+ rm )n
Payout Ratiom,n * (1+ g m )n *(1 + gm, n )
+
rm - gm
(rm - gm, n )(1+ rm )n

where

Payoutj, gj, rj = Payout, growth and risk of the firm

Payoutm, gm, rm = Payout, growth and risk of the

market

Relative PE: Summary of Determinants

The relative PE ratio of a firm is determined by two variables. In

particular, it will
increase

as the firms growth rate relative to the market

increases. The rate of change in the relative PE will itself be a
function of the market growth rate, with much greater changes
when the market growth rate is higher. In other words, a firm or
sector with a growth rate twice that of the market will have a
much higher relative PE when the market growth rate is 10%
than when it is 5%.

decrease

as the firms risk relative to the market increases. The

extent of the decrease depends upon how long the firm is
expected to stay at this level of relative risk. If the different is
permanent, the effect is much greater.

Relative PE ratios seem to be unaffected by the level of rates,

which might give them a decided advantage over PE ratios.

Value/Earnings and Value/Cash flow Ratios

While Price earnings ratios look at the market value of equity
relative to earnings to equity investors, Value earnings ratios look
at the market value of the firm relative to operating earnings.
Value to cash flow ratios modify the earnings number to make it a
cash flow number.
The form of value to cash flow ratios that has the closest parallels
in DCF valuation is the value to Free Cash Flow to the Firm, which
is defined as:

Value/FCFF = (Market Value of Equity + Market Value of Debt-Cash)

EBIT (1-t) - (Cap Ex - Deprecn) - Chg in WC
If

the numerator is net of cash (or if net debt is used, then the
interest income from the cash should not be in denominator

The

interest expenses added back to get to EBIT should

correspond to the debt in the numerator. If only long term debt
is considered, only long term interest should be added back.

Value of Firm/FCFF: Determinants

V0 =

(1 + g) n
FCFF (1 + g) 1
0
n
(1+ WACC)
WACC - g

FCFF (1+ g) n (1+ g )

0
n
+
(WACC - g )(1 + WACC) n
n

Reverting back to a two-stage FCFF DCF model, we get:

V0 = Value of the firm (today)

FCFF0 = Free Cash flow to the firm in current year

g = Expected growth rate in FCFF in extraordinary

growth period (first n years)
WACC = Weighted average cost of capital
gn = Expected growth rate in FCFF in stable growth
period (after n years)

Value Multiples

Dividing both sides by the FCFF yields,

V0
=
FCFF0

(1 + g) n
(1 + g) 1 (1 + WACC) n
WACC - g

(1+ g) n (1+ gn )
+
n
(WACC - gn )(1 + WACC)

The value/FCFF multiples is a function of

the cost of capital

the expected growth

Alternatives to FCFF - EBIT and EBITDA

Most analysts find FCFF too complex or messy to use in

multiples (partly because capital expenditures and working
capital have to be estimated). They use modified versions of the
multiple with the following alternative denominator:
after-tax
pre-tax

operating income or EBIT(1-t)

operating income or EBIT

net

operating income (NOI), a slightly modified version of

operating income, where any non-operating expenses and
income is removed from the EBIT

EBITDA,

which is earnings
depreciation and amortization.

before

interest,

taxes,

Reasons for Increased Use of Value/EBITDA

1. The

multiple can be computed even for firms that are reporting net
losses, since earnings before interest, taxes and depreciation are
usually positive.
2. For firms in certain industries, such as cellular, which require a
substantial investment in infrastructure and long gestation periods,
this multiple seems to be more appropriate than the price/earnings
ratio.
3. In leveraged buyouts, where the key factor is cash generated by
the firm prior to all discretionary expenditures, the EBITDA is the
are unwise or earn substandard returns.
5. By looking at the measure of cash flows from operations that can
be used to support debt payment at least in the short term.
4. By looking at cash flows prior to capital expenditures, it may
provide a better estimate of optimal value, especially if the
capital expenditures he value of the firm and cash flows to the firm
it allows for comparisons across firms with different financial
leverage.

Value/EBITDA Multiple

The Classic Definition

Value
M arket Value of Equity + M arket Value of Debt

EBITDA Earnings before Interest, Taxes and Depreciation

The No-Cash Version

Enterprise Value Market Value of Equity + Market Value of Debt - Cash

EBITDA
Earnings before Interest, Taxes and Depreciation

When cash and marketable securities are netted out of

value, none of the income from the cash and securities
should be reflected in the denominator.

The Determinants of Value/EBITDA Multiples: Linkage to DCF

Valuation

Firm value can be written as:

FCFF1
V0 =
WACC - g

The numerator can be written as follows:

FCFF

= EBIT (1-t) - (Capex - Depr) - Working Capital

= (EBITDA - Depr) (1-t) - (Capex - Depr) - Working

Capital
= EBITDA (1-t) + Depr (t) - Capex - Working Capital

Price-Book Value Ratio

The price/book value ratio is the ratio of the market value of

equity to the book value of equity, i.e., the measure of
shareholders equity in the balance sheet.

Price/Book Value =

Market Value of Equity

Book Value of Equity

Consistency Tests:
If

the market value of equity refers to the market value of

equity of common stock outstanding, the book value of
common equity should be used in the denominator.

If

there is more that one class of common stock

outstanding, the market values of all classes (even the nontraded classes) needs to be factored in.

Price Book Value Ratio: Stable Growth Firm

Going back to a simple dividend discount model,

P0

DPS1
r gn

Defining the return on equity (ROE) = EPS0 / Book Value of

Equity, the value of equity can be written as:
P0

BV0 * ROE * Payout Ratio* (1 gn )

r-gn

P0
ROE * Payout Ratio* (1 g n )
PBV =
BV 0
r-g
n

If the return on equity is based upon expected earnings in the

next time period, this can be simplified to,
P0
ROE * Payout Ratio
PBV =
BV 0
r-g
n

Price Book Value Ratio: Stable Growth Firm

This formulation can be simplified even further by relating growth to

the return on equity:
g = (1 - Payout ratio) * ROE

Substituting back into the P/BV equation,

P0
ROE - gn
PBV =
BV 0
r-gn

The price-book value ratio of a stable firm is determined by the

differential between the return on equity and the required rate of
return on its projects.

The Valuation Matrix

M V/BV

Overvalued
Low ROE
High M V/BV

High ROE
High M V/BV

ROE-r

Low ROE
Low M V/BV

Undervalued
High ROE
Low M V/BV

Determinants of Value/Book Ratios

To see the determinants of the value/book ratio, consider

the simple free cash flow to the firm model:

FCFF1
V0 =
WACC - g

Dividing both sides by the book value, we get:

V0
FCFF1 /BV
=
BV
WACC - g

If we replace, FCFF = EBIT(1-t) - (g/ROC) EBIT(1t),we get

V0
ROC - g
=
BV
WACC - g

Price Sales Ratio

The price/sales ratio is the ratio of the market

value of equity to the sales.

Price/ Sales=

Market Value of Equity

Total Revenues

Consistency Tests
The

price/sales ratio is internally

inconsistent, since the market value of
equity is divided by the total revenues of
the firm.

Price/Sales Ratio: Determinants

The price/sales ratio of a stable growth firm can be estimated beginning

with a 2-stage equity valuation model:
P0

DPS1
r gn

Dividing both sides by the sales per share:

P0
Net Profit M argin* Payout Ratio*(1 g n )
PS =
Sales 0
r-g
n

Price/Sales Ratio for High Growth Firm

When the growth rate is assumed to be high for a future

period, the dividend discount model can be written as
follows:

(1+
g)

EPS0 * Payout Ratio* (1 + g) * 1

(1+ r) n
EPS 0 * Payout Ration * (1+ g)n *(1+ g n )
P0 =
+
r -g
(r - g n )(1+ r) n

Dividing both sides by the sales per share:

(1+ g) n
Net M argin * Payout Ratio* (1+ g) * 1

P0
(1+ r)n
Net M arginn * Payout Ration * (1+ g) n *(1 + gn )
=
+

Sales 0
r -g
(r - gn )(1 + r)n

where Net Marginn = Net Margin in stable growth phase

Price Sales Ratios and Profit Margins

The key determinant of price-sales ratios is the profit margin.

A decline in profit margins has a two-fold effect.

First,

the reduction in profit margins reduces the pricesales ratio directly.

Second,

the lower profit margin can lead to lower

growth and hence lower price-sales ratios.

Expected growth rate = Retention ratio * Return on

Equity
= Retention Ratio *(Net Profit / Sales) * ( Sales / BV
of Equity)
= Retention Ratio * Profit Margin * Sales/BV of
Equity

The value of a brand name

One of the critiques of traditional valuation is that is fails to consider the

value of brand names and other intangibles.

The approaches used by analysts to value brand names are often ad-hoc and
may significantly overstate or understate their value.

One of the benefits of having a well-known and respected brand name is

that firms can charge higher prices for the same products, leading to
higher profit margins and hence to higher price-sales ratios and firm
value. The larger the price premium that a firm can charge, the greater is
the value of the brand name.

In general, the value of a brand name can be written as:

Value of brand name ={(V/S)b-(V/S)g }* Sales
(V/S)b = Value of Firm/Sales ratio with the benefit of the brand name
(V/S)g = Value of Firm/Sales ratio of the firm with the generic product

Averaging Across Multiples

This procedure involves valuing a firm using five or six or

more multiples and then taking an average of the valuations
across these multiples.

This is completely inappropriate since it averages good

estimates with poor ones equally.

If some of the multiples are sector based and some are

market based, this will also average across two different
ways of thinking about relative valuation.

Picking one Multiple

This is usually the best way to approach this issue. While

a range of values can be obtained from a number of
multiples, the best estimate value is obtained using one
multiple.

The multiple that is used can be chosen in one of two

ways:

Use the multiple that best fits your objective. Thus, if

you want the company to be undervalued, you pick
the multiple that yields the highest value.

Use the multiple that has the highest R-squared in the

sector when regressed against fundamentals. Thus, if
you have tried PE, PBV, PS, etc. and run regressions
of these multiples against fundamentals, use the
multiple that works best at explaining differences
across firms in that sector.

Use the multiple that seems to make the most sense

for that sector, given how value is measured and
created.