CFA Level I Exam · Relative Value Equity Valuation Approaches

Cross-Border and Industry-Specific Valuation Issues in Multiples

Updated 7 October 2026 · Fact-checked

Multiples are only comparable when the numerator and denominator are measured the same way. Across countries and industries, differences in accounting standards, growth, risk, interest rates, and business models distort P/E, P/B and EV/EBITDA. Adjust the accounting where you can, then explain the remaining gaps through fundamentals, or pick a more suitable multiple.

Understand Cross-Border and Industry-Specific Valuation Issues

A multiple is a price divided by a fundamental, such as earnings, book value, sales or EBITDA. The method of comparables says similar firms should trade at similar multiples. That only holds if the firms are truly similar and the fundamentals are measured on the same basis.

Across borders, three things break comparability. First, accounting differences: IFRS and US GAAP differ on items such as inventory (LIFO is allowed under US GAAP, not IFRS), development costs, revaluation of fixed assets, and impairment reversals. These change reported earnings and book value, so P/E and P/B are not like for like. Second, fundamental differences: countries differ in expected growth, risk, interest rates, and inflation. A higher required return lowers a justified multiple. Higher expected growth raises it. A higher P/E in one country is not automatically a sign of overvaluation. Third, other factors such as differing tax rates, currency, and market structure.

Across industries, the right multiple changes with the business. Cyclical firms have volatile earnings, so a P/E on trough earnings looks very high and one on peak earnings looks very low. Analysts use normalized earnings (average or mid-cycle earnings) for these. Firms with negative earnings have no meaningful P/E, so analysts use P/S, EV/Sales, P/B or EV/EBITDA instead. Capital-intensive firms differ in depreciation policy, so EV/EBITDA can be more comparable than P/E. P/B is commonly used for financial firms because their assets are largely financial instruments carried at or near fair value, though some, such as loans, are held at amortized cost.

The core skill is a two-step habit. First, make the inputs consistent: adjust for accounting differences, one-offs and cycle effects. Second, ask whether any remaining gap in the multiple is explained by growth, risk, or business model. If it is, the gap is not a mispricing.

Key formulas to remember

Justified P/E (Gordon growth, trailing): P0/E0 = [payout × (1 + g)] ÷ (r − g); Shows why higher r lowers P/E and higher g raises it. Requires r > g.
Justified P/E (leading): P0/E1 = payout ÷ (r − g); Uses next year's expected earnings. Payout = 1 − retention.
Normalized earnings (historical average method): Normalized EPS = average EPS over a full business cycle; Simple and objective but ignores changes in the firm's size and capital base.
Normalized earnings (average ROE method): Normalized EPS = average ROE × current book value per share; Reflects current capital base. Use when the firm has grown or shrunk.
Multiples for negative earnings: Use P/S, EV/Sales, P/B or EV/EBITDA instead of P/E; A negative P/E is not meaningful. Do not average it into a peer median.
Harmonic mean of multiples: Harmonic mean = n ÷ Σ(1 ÷ multiple); It is the average of the reciprocals of the multiples (for P/E, the earnings yields), inverted. It reduces the influence of very large multiples (outliers). It requires all multiples to be positive.

How to solve Cross-Border and Industry-Specific Valuation Issues questions

Use this sequence for any question on comparing multiples across countries, standards or industries.

1Identify what is being compared: which multiple, which companies, which countries or industries.
2Check that the denominator is measured consistently. Look for IFRS versus US GAAP, LIFO versus FIFO, one-off items, and different fiscal year ends.
3Check whether earnings are cyclical or negative. If so, consider normalized earnings or a different multiple such as P/S, EV/Sales or P/B.
4Compare fundamentals: growth, required return (risk and interest rates), payout, and leverage. Ask which direction each pushes the multiple.
5Decide whether the difference in multiples is justified by fundamentals or is a sign of mispricing.
6Choose the answer that makes inputs consistent first, and that avoids concluding mispricing from raw multiples alone.

Quickest way: Three-question screen for multiple comparisons

When to use it: Use for conceptual questions where the options differ in the reason given for a multiple gap or the best multiple to use.

Is the denominator the same kind of number in both firms (same accounting, no one-offs, mid-cycle)? If not, that is the likely issue.
Is the denominator negative or volatile? Then a P/E is the wrong tool; move to sales, book value or EBITDA, or normalize.
Do growth or risk differ? Higher growth and lower required return justify a higher multiple.
Eliminate any option that calls a stock over or undervalued from raw multiples without these checks.

Common mistakes in Cross-Border and Industry-Specific Valuation Issues

Concluding a stock in a high-P/E country is overvalued from the multiple alone.
Students treat the peer median as the fair value anchor.
Fix: Check growth, interest rates and risk first. A higher justified P/E can come from higher g or lower r.
Using a P/E for a firm with negative earnings or averaging it into the peer group.
P/E is the most familiar multiple.
Fix: Treat negative P/E as not meaningful. Use P/S, EV/Sales, P/B or EV/EBITDA, or normalized earnings.
Using trough or peak EPS for a cyclical firm.
Students use the latest reported EPS by default.
Fix: Normalize using average EPS over a cycle, or average ROE × current book value per share.
Assuming IFRS and US GAAP earnings are directly comparable.
Both are seen as high-quality standards.
Fix: Look for known differences such as LIFO allowed only under US GAAP, and adjust or flag them before comparing.
Mixing up the two normalization methods.
Both use the word average.
Fix: Historical average uses past EPS. Average ROE method multiplies average ROE by current book value per share.
Using P/E for banks or EV/EBITDA for firms with very different depreciation without thought about fit.
Students apply one multiple everywhere.
Fix: Match the multiple to the business: P/B for financial firms, EV/EBITDA to remove capital structure and depreciation differences.

Worked examples

Example 1

A cyclical manufacturer has a current share price of $60. Its EPS over the last full cycle was $2.00, $4.00, $6.00 and $4.00 in four years. Current book value per share is $30, and average ROE over the cycle was 12%. Using the average ROE method, what is the normalized P/E? Options: A) 14.0 B) 16.7 C) 20.0

Show the solution

Average ROE method: normalized EPS = average ROE × current book value per share.
Normalized EPS = 0.12 × 30 = $3.60.
Normalized P/E = 60 ÷ 3.60 = 16.67.
The historical average EPS is (2 + 4 + 6 + 4) ÷ 4 = $4.00. It is a distractor here, because the question names the average ROE method. Using it would give 60 ÷ 4.00 = 15.0, which is not an option.
Options A (14.0) and C (20.0) are not tied to a specific method. They are simply wrong values, and only 16.7 matches the method named.

Answer: B) 16.7

Example 2

An analyst finds that Company X, listed in Country 1, trades at a P/E of 12 while a similar Company Y in Country 2 trades at a P/E of 18. Both report under IFRS. Which is the most appropriate conclusion? A) Y is overvalued relative to X. B) The gap may be explained by differences in growth, risk or interest rates, so more analysis is needed. C) X is undervalued because it has the lower multiple.

Show the solution

Both firms report under IFRS, so accounting is less likely the cause, but one-offs could still matter.
A multiple reflects growth, required return and payout. Country 2 may have higher expected growth or lower interest rates and risk.
Using the justified P/E formula, a lower r or a higher g raises P/E, so a gap is not proof of mispricing.
Options A and C draw a mispricing conclusion from raw multiples alone, which is the trap.

Answer: B) The gap may be explained by differences in growth, risk or interest rates, so more analysis is needed.

Exam tips

When a question gives a negative EPS, expect the answer to be a different multiple, usually P/S, EV/Sales, P/B or EV/EBITDA, never a P/E.
For cyclical firms, expect normalized earnings. Read carefully which method is named and compute with that one.
Eliminate options that claim over or undervaluation from a raw cross-country multiple gap without checking fundamentals.
Know a few standard differences: LIFO is allowed under US GAAP but not IFRS, and IFRS allows revaluation of some long-lived assets.
Questions are three-option MCQs, so remove the two options that skip the consistency check on inputs.

Practice questions from Relative Value Equity Valuation Approaches

Cross-Border and Industry-Specific Valuation Issues in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Cross-Border and Industry-Specific Valuation Issues: frequently asked questions

Why does P/E differ across countries?

P/E reflects expected growth, required return, and payout. Countries differ in interest rates, risk and growth, and in accounting rules and taxes, so identical firms can justify different P/Es.

How do I handle negative earnings in P/E valuation?

A negative P/E is not meaningful. Use P/S, EV/Sales, P/B or EV/EBITDA, or use normalized earnings if the loss is temporary.

What are normalized earnings?

They are earnings adjusted to reflect a mid-cycle level, removing peaks and troughs. Two common methods are historical average EPS and average ROE multiplied by current book value per share.

Which multiple suits which industry?

Match the multiple to the business. Financial firms often use P/B, cyclical firms use normalized P/E, and firms with different capital structures or depreciation policies often use EV/EBITDA.