RELATIVE VALUATION MODEL ANALYSIS OF IDX

Abstract

There are various valuation models can be used by investors in order to predict the stock value. This paper focuses on the Relative Valuation Model, which is the popular model used by investors as it is easier to use compared to other models. The aim of this paper is to compare the prediction accuracy of various ratios in the model. Ratios examined in this paper are Price to Earning (PE), Price to Book Value (PBV), Price to Cash Flow (PCF), and Price to Sales (PS). Using the LQ45 listed stocks during period 2006 – 2010, it is found that, overall, PBV appears to be the best ratio to predict LQ45 stocks in Indonesian equity market. However, mixed results are found in the yearly analysis, in which PE, PBV, and PCF result in lower prediction errors, in different years. In the sector industry analysis, both PE and PBV are the best predictors in three sectors each. The descriptive analysis is supported by the hypo research testing that shows the accuracy of examined ratios is different. The research result implication is that investors should take time and sectors into the account before choosing a single ratio as a predictor.