Market Multiples and the Valuation of Cyclical Companies

Abstract

Market multiples are more often used than studied. Equity analysts, investment bankers and other practitioners widely use market multiples to estimate the value of companies. Nevertheless, literature about multiples is not as rich as the wide use of these valuation tools would suggest. This paper, focusing on European listed companies, investigates how multiples can be used in the valuation of cyclical companies, a much less investigated research topic. We test the accuracy of multiples to understand whether their performance in valuing cyclical companies is better, worse or equal to the performance found in prior studies, where both cyclical and non cyclical companies are analyzed without distinguishing between them. We also attempt to verify whether the way in which multiples are calculated significantly affects the accuracy of estimation. Our aim is to develop a valuation approach consistent with valuation theory and helpful in everyday practice.