The Dirty Dozen of Valuation Ratios: Is One Better Than Another?

Vol. 16, No. 2, 2018
Eero Pätäri, Ville Karell, Pasi Luukka and Julian Scott Yeomans

This paper compares the efficacy of both traditional valuation ratios and an extensive set of related combination criteria in identifying the future best-performing stocks for a comprehensive U.S. sample over the period 1971–2013. Value portfolios formed on different criteria have remarkably different exposures to style factors. We find evidence of strong relative efficacy of three enterprise value multiples (EBIT/EV, EBITDA/EV, and S/EV). Particularly, the evidence for the unique characteristics of S/EV contributes to the existing literature. The defensive characteristic of high dividend yield is pervasive both as a stand-alone criterion and as a combination sub-criterion.