ANALYSIS OF MARKET MULTIPLES & STOCK RETURNS

Abstract

Market multiples have been used for determining the current value of a company, which incorporates the stock's price and place it against a representative of the intrinsic worth of the firm’s stock, such as its earnings, sales, equity, etc. This thesis was based primarily on examining the variability of stock return arising due to market multiples (price to sales, price to book, price to earnings and price to cash flows ratios). This thesis used the same four multiples that were employed in the research work by Barbee, Jeong, and Mukheiji (2008) and examines its impact on the annual returns of the chemical companies listed on Karachi Stock Exchange 100 Index. A total of 190 observations have been used across 19 chemical companies for the 10 year data from 2000 to 2010. To find out the multiple which influenced stock return, a relationship model was developed. This model evaluated the strength of the predictability of the stock return by using each multiple simultaneously. For testing hypothesis, Multiple Regression Model was used that identified market multiples that predicted stock return, and the strength with which these could be used to predict the stock return. The results of this thesis concluded that only price to book ratio can somewhat predict stock return, only to the extent of 20.5%.