International Considerations When Using Multiples

Comparing companies across borders is complicated as it involves differences in accounting methods, economic differences, cultural differences, and resulting differences in growth and risk opportunities. P/E ratios for firms in the same industry but in different countries have been found to vary widely. Although international accounting standards are converging, differences still exist across borders, sometimes making comparisons difficult.

Analysts must be aware of differences across standards and adjust when disclosures provide sufficient data to do so. International accounting differences affect the comparability of all price multiples.

Question

Which of the following is least likely a source of cross-border valuation differences?

1. Accounting methods.
2. Differences in risk.
3. Differences in P/E.

Solution

The correct answer is C.

The differences in P/E are the least likely a source of cross-border valuation differences.

B is incorrect: Differences in risk are a source of cross-border valuation differences.

A is incorrect: Accounting methods are a source of cross-border valuation differences.

Reading 25: Market-Based Valuation: Price and Enterprise Value Multiples

LOS 25 (o) Explain sources of differences in cross-border valuation comparisons.