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Past studies have shown that investment strategy using two popular metrics, the earnings‐price ratio (EP) and book‐to‐market ratio (BM) enable investors to reap abnormal returns. More recent development of another ratio, economic value‐added‐to‐market value (EVAM) can be seen as a hybrid of EP and BM ratios. The purpose of this study is to examine whether portfolios created by utilizing the EVAM ratio will generate higher returns than portfolios formed with EP or BM ratios.

Utilizing the EVA data obtained from Stern Stewart & Co. and financial data from COMPUSTAT and center for research in security prices (CRSP), portfolios are created following the Fama and French portfolio formation methodology. The authors form separate portfolios using EP, BM or EVAM ratios where firms are ranked by a ratio in year t, then split into deciles. Then portfolios are constructed in year t + 1 for each decile and equally weighted portfolio returns are calculated. The cumulative ten‐year returns are compared between portfolios formed with EP, BM and EVAM ratios.

There are three interesting findings. One, the EP portfolios depict results that have long been documented. That is, value stock (low price‐to‐earnings ratio firms) and growth stocks (high price‐to‐earnings ratio) exhibit the highest returns. Two, the ten BM portfolio performances are not statistically different. Three, the EVAM ratios indicate that the negative EVAM (lowest decile) portfolio exhibit the highest return and the second highest return is generated by the highest EVAM portfolio. The general results of the thirty portfolios show that the highest EVAM ratio (EVAM10) performs the best. However, the pairwise mean differences between EP, BM and EVAM portfolios do not show statistical differences over the 1995–2004 period.

Although investment strategies using EP ratio and BM ratio have been thoroughly studied, investment strategy using EVAM ratio has not. Given that it has been documented that EVA is a better conceptual measure of value, portfolio managers or investors would be interested to know whether utilizing EVA for investment strategy would earn a higher return than strategies that use EP or BM ratios.

The purpose of this paper is to establish whether a terminal value is a substantial amount of the final figure in a hotel’s valuation. Malta’s scenario has been delved into. This due to the fact that owing to Malta’s high population density and its restrictive land area, land values attract a high premium as compared with larger developed countries. Other matters such as earnings’ multipliers derived from a cap rate (initial yield), CAPEX has also been delved into.

The methodologies adopted in hotel valuation practice has been delved into. An extensive literature review is undertaken to analyse the earnings multiplier adopted by various authors over the past 30-year period. The hotel cap rate (initial yield) has been compared with similar yields adopted in the institutional and property markets and then compares to market-based data. A discussion is undertaken on the validity of adopting discounted cash flow, as against the short cut market appraisal approach. Capitalization rates, cap rates have also been referred to as obtained from the academic and practitioners field and compared. Depreciation and the anticipated annual accommodation charges have been analysed. A database of hotel rooms value over the past 20-year period has been referred.

A table outlines the earnings’ multipliers in perpetuity or for the limited expected design life for various cap rates. This data will act as a guide in guiding practitioners to establish an earnings’ multiplier to be applied in their valuation methodology. An example in the Appendix clarifies the manner in which this data table is to be utilized. The finding of this example notes that for this hotel in Malta, as constructed on private land, the terminal value for this development hovers around the 30 per cent of the market value.

This analysis is based on five valuations as undertaken on five hotels in Malta with classification grades varying from III to V. This notes that the terminal value varies within a range of 9-45 per cent of the total value. This analysis has to be undertaken for other countries for a global range of land terminal values percentages to be established.

Establishing the terminal value of a hotel business, will offer greater security for secured lending facilities required. It will further act as an important tool to establish the feasibility of a hotel development.

Updated insight is given to existing hotel valuation methodologies by delving into the workings of the earnings’ multiplier and establishes that in today’s market the terminal value of the hotel basis has to be accounted for. The above findings are based on a link between theory and practice.