Relative company-valuation methods and lessons of the global financial crisis

Abstract

The subject of this article is the use of relative valuation for estimating the value of compa nies and the risks associated with its application in Bulgaria. The focus is on the analysis of typical omissions and weaknesses characteristic of the practical application of widely used market ratios. Special attention has been put on some important requirements related to the correct interpretation of average market ratios. The definition, argumentation and us age of correct ratios require in-depth knowledge of their nature and of the fundamental factors which determine their values. With regard to this, a review of price-earnings and price-to-book value ratios on the Bulgarian capital market and analysis of the same ratios from the perspective of the reasonability of their levels has been made. Fundamental priceearnings and price-to-book value ratios have also been estimated and compared with the corresponding actual ratios on the Bulgarian Stock Exchange. The results of the study in dicate that during the period prior to the financial crisis the average levels of the actual ratios on the Bulgarian capital market were considerably higher than the levels suggested