Abstract
P/E-ratio valuation still plays an important role among investment analysts and advisors. In an earnings-based valuation model of this kind, the value of owners' equity is commonly calculated as a function of an observed P/E-ratio for some peer company, or the mean/median P/E-ratio for some group of peer companies. The question being addressed in the article is concerned with the validity of a benchmark P/E-ratio being assessed in this way. Assuming that there is one peer company, the importance of differences (between the company being valued and its peer) with regard to the book return on owners' equity and the growth of owners' equity have been investigated. In the main, it is shown that relative P/E-ratio valuation will not be able to handle differences in the expected book return or growth of owners' equity. In an empirical context however, controlling for industry and the expected book return for next year, together with some modification of the valuation model itself, is likely to improve the accuracy of earnings-based relative valuation.