Question

Hello,

My name is Ricardo Farias Correia and I m doing some valuations of Portuguese companies.By professor Damodaran´s site I can access: EV/Sales, Ev/ EBIT and EV/ EBITDA multiples in Europe . Should I lower the multiples because the companies are Portuguese and operate in Portugal?

Many thanks for the help

Kind regards

RFC

Answer 1

I don't believe so. Whenever you use a multiple you need to find the key drivers of the multiple and then run regressions. For instance, P/E has 3 key drivers :growth ,risk,and payout ratio. When you run a regression you need to include the three variables and then put your own estimates for the portoguese firm to get the expected P/E then compare it with the observed one to see if it is over or undervalued. What you can do is the following:
1. add an additional factor that captures the country risk such as the rating of the country (for example AAA is 1, AA+ is 2 , AA is 3 etc.... or a dummy =1 if the rating of the country is a junk rating and 0 othewise) or
2. Take Portoguese firms only

I am sure there are many solutions but don't artificially push the multiples down.