The Effectiveness of Fundamentally-Adjusted Price-to-Sales Multiple in Stock Valuation : The Case of Warsaw Stock Exchange

In the paper, we evaluated the effectiveness of fundamentally-adjusted price-to-sales multiple in discriminating between undervalued and overvalued stocks listed on the Warsaw Stock Exchange. Because net sales are always positive, the significant advantage of P/S multiple is its usefulness in the periods characterized by significant deterioration of companies' financial results (such as the current global economic slowdown). The research comprised 1999-2009 years. The analysis of the average nominal annual returns showed that in the case of Warsaw Stock Exchange the strategy of buying 20% most undervalued stocks as indicated by the linear regressions of P/S multiples generated the average annual return (raw as well as risk-adjusted) exceeding returns of alternative strategies based on simple multiples as well as the average nominal return of the market as a whole. It means that allowing for the relationship between P/S multiples and fundamental variables increases the accuracy of stocks' valuation