The Price-Earnings ratio is the most over-used valuation tool in today’s global equity markets. On its own, it is not the most appropriate tool for valuing insurers, banks, real estate, or oil & gas companies. It also does not travel well in terms of cross border, global sectoral comparisons.
What practitioners need to know therefore, is which tools to use for which sectors as they navigate today’s globally interconnected electronic equity markets. Price to Sales, Price to Book Values, Enterprise Values, Embedded vs Appraisal Values, Returns on Equity, Dividend Yields, EBIDTA multiples, Reserves-Production ratios, Tier One Equity vs Risk Weighted Assets and so on. The list is long, but selecting the right methodology is the starting point for a thorough and transparent analysis.
Finally, every investment professional needs to be confident enough to be able to build and operate simple Dividend Discounting & Discounted Cash Flow valuation models, understand how the inputs are derived, appreciate the dangers of ‘garbage in, garbage out’ and crucially, understand how to interpret the outputs.