How do you use market multiples for cross-border equity comparisons?

Cross-border multiple comparisons are tricky but essential in global equity analysis. The key is understanding WHY multiples differ across countries and adjusting accordingly.

Why multiples differ across borders:

1. Accounting standards — IFRS vs. US GAAP treatment of R&D, leases, goodwill, and revenue recognition creates different earnings figures for economically similar companies
2. Growth expectations — Higher expected growth justifies higher P/E ratios
3. Risk (discount rates) — Country risk, currency risk, and political risk affect required returns
4. Industry mix — A country's market-level P/E is driven by its sector composition
5. Inflation — Higher inflation tends to depress real P/E ratios
6. Tax differences — Corporate tax rates affect after-tax earnings

Adjustments for comparability:

Issue	Adjustment
IFRS vs. GAAP earnings	Restate to common accounting basis
Different tax rates	Use pre-tax multiples (EV/EBIT)
Capital structure differences	Use EV/EBITDA instead of P/E
Cyclicality	Use normalized or Shiller P/E
Currency effects	Express in common currency or use local multiples

Example: Comparing Nippon Steel Corp (Japan, IFRS) vs. Cascade Steel Inc. (US, GAAP):

• Nippon trades at P/E of 8x; Cascade at P/E of 14x
• But Japan's steel industry has lower growth expectations (1% vs. 3%)
• Nippon capitalizes more development costs under IFRS, boosting earnings
• Adjusting Nippon's earnings to GAAP basis raises its P/E to 10x
• Adjusting for growth differential (using PEG ratio): Nippon PEG = 10x/1% = 10; Cascade PEG = 14x/3% = 4.7
• Cascade is actually cheaper on a growth-adjusted basis

Preferred multiples for cross-border:

1. EV/EBITDA — Minimizes accounting and capital structure distortions
2. Price/Book — Useful for financial institutions but sensitive to accounting
3. EV/Revenue — Most comparable when earnings are distorted
4. PEG ratio — Adjusts P/E for growth differences

Exam tip: The CFA exam often asks why a company in one country has a higher P/E than a similar company in another country. Be prepared to discuss accounting differences, growth, and risk as explanatory factors.

Practice equity valuation in our CFA Level II question bank.