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Why did you select the Price/Sales ratio for modelling as opposed to the more popular EV/EBITDA ratio?

Answer

The price/sales or P/S ratio has all the desirable characteristics of a variable to be modelled than other valuation ratios. Some of those advantages include:

  1. P/S is strictly positive, as both P & S are greater than zero, whereas other ratios such as EV/EBITDA, P/EBITDA, P/E, etc., can be negative which render them useless.

  1. Although EV can be calculated from transaction prices, detailed required information on debt is not always available. Thus, some transactions without such information will then have to be discarded.

  1. Log transformed P/S ratio is normally (or Gaussian) distributed, which satisfies requirements for any kind of regression.

Although our models use P/S ratio with the computed valuation, all the commonly used valuation metrics such as P/E, P/EBITDA, EV/EBITDA, and EV/Syu are available to be viewed as a summary of a group of assets as well as a time-series of such values.

Further Reading

For more information on our model, its precision, and performance, refer to our paper here.

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