(Clute Institute, 2013-05) Nel, W. S.; Bruwer, B. W.; Le Roux, N. J.
Analysts typically distinguish between equity- and entity-based approaches when employing the
free cash flow model to perform equity valuations. However, when multiples are used to perform
equity valuations, analysts often neglect to distinguish between equity- and entity-based
approaches. In addition, limited empirical evidence exists on the relative valuation performance
of equity- and entity-based multiples in developed capital markets and the emerging markets
literature is entirely silent in this regard. In this paper the valuation accuracy of equity-based
multiples is compared to that of entity-based multiples in valuing the equity of South African
companies listed on the JSE Securities Exchange for the period 2001-2010. The research results
reveal that equity-based multiples significantly outperform entity-based multiples, indicating a
potential increase in valuation accuracy of as much as 15.37%.