Page 24 - FINAL CFA SLIDES DECEMBER 2018 DAY 14

Session Unit 14:
Multiples Based on
49. Equity Valuation: Concepts and Basic Tools
Comparables

• Comparing Renee’s Bakery’s ratios to the industry averages for 20X3, the price multiples are lower in all cases

except for the P/E multiple. This cross-sectional evidence suggests that Renee’s Bakery is undervalued.
• The P/E ratio merits further investigation. Renee’s Bakery may have a higher P/E because its earnings are
depressed by high depreciation, interest expense, or taxes. Calculating the price-EBITDA ratio would provide an
alternative measure that is unaffected by these expenses.
• On a time series basis, the ratios are trending downward. This indicates that Renee’s Bakery may be currently
undervalued relative to its past valuations.
• We could also calculate average price multiples for the ratios over 20X1–20X3 as a benchmark for the current
values:
tanties

The current P/E, P/CF, and P/B ratios are lower than their 3-year averages. This indicates that

Renee’s Bakery may be currently undervalued. It also may be the case, however, that P/E ratios
for the market as a whole have been decreasing over the period due to systematic factors.