Using absolute and relative financial valuation models to estimate the true value of investment decisions

Abstract

This study aims to measure the impact of integrating absolute and relative financial valuation models in estimating the intrinsic value of industrial companies' stocks in the Iraq Stock Exchange, which is characterized by a dynamic environment and price distortions that make investment decision-making a real challenge requiring strategies based on analysis and valuation before decision-making to ensure profit realization and risk neutralization. Using a quantitative analytical approach, the research was applied to a purposive sample consisting of 12 industrial companies listed on the Iraq Stock Exchange, spanning a ten-year period (2014-2023). The study relied on the Free Cash Flow to Firm (FCFF) and Free Cash Flow to Equity (FCFE) models as representatives of absolute valuation, and the Enterprise Value to Sales (EV/S) and Enterprise Value to Earnings Before Interest, Taxes, Depreciation, and Amortization (EV/EBITDA) models as representatives of relative valuation. Using SPSS software, the multiple regression analysis results showed that the integrative framework combining both valuation approaches provides higher explanatory power in determining stock value compared to relying on either approach individually. Based on these findings, the study recommends adopting an integrated framework that combines absolute and relative valuations, ensuring multiple insights that enhance the reliability of investment decisions.