valuation questions
1. What do you expect to drive a company’s price-to-book equity and price-to-earnings multiples?
Company’s net sales and profit margin: This is company’s ability to use its equity to generate abnormal earnings. This is driven by industry maturity and performance under the given economic condition. Mature and highly saturated industry will have a lower profit margin as the competition is getting intense and it is harder to earn profit.
Company’s financial strategy: the effectiveness of the financial strategy is evaluated through different financial strategy. If the company’s return on equity is greater than the cost of the capital, the equity value-to-book multiple will be positive. The company’s strategy also affects its perceived risk which drives the price to earning multiple.
Operational efficiency: this is the utilisation of company’s asset which is a profitability ratio. A higher ROA usually indicate high ROE and therefore result in higher value of both multipliers.
Future growth: this is the expected future growth of the company and this will be reflected on the future ROE.
Growth in book value of the equity: the growth of equity base in positive value project will increase the equity value to book multiple.
2. Match the price-to-book equity valuation multiple below with each of the four restaurant business discussed above. What is your reasoning for the matches you selected?
WShen making the matching, my reasoning based on the following factors:
Financial leverage gain: all company except company A have negative financial leverage gain, but the company C and D having an improving trend. On the other hand, company B’s leverage gain were falling from a positive number in 1999 to a negative value in 2002. This means the return on equity is deteriorate the cost of capital.
ROA: Company A, B and D reported a steady growth in ROA over the time period whereas company C had declining ROA over the time period and it
Company’s net sales and profit margin: This is company’s ability to use its equity to generate abnormal earnings. This is driven by industry maturity and performance under the given economic condition. Mature and highly saturated industry will have a lower profit margin as the competition is getting intense and it is harder to earn profit.
Company’s financial strategy: the effectiveness of the financial strategy is evaluated through different financial strategy. If the company’s return on equity is greater than the cost of the capital, the equity value-to-book multiple will be positive. The company’s strategy also affects its perceived risk which drives the price to earning multiple.
Operational efficiency: this is the utilisation of company’s asset which is a profitability ratio. A higher ROA usually indicate high ROE and therefore result in higher value of both multipliers.
Future growth: this is the expected future growth of the company and this will be reflected on the future ROE.
Growth in book value of the equity: the growth of equity base in positive value project will increase the equity value to book multiple.
2. Match the price-to-book equity valuation multiple below with each of the four restaurant business discussed above. What is your reasoning for the matches you selected?
WShen making the matching, my reasoning based on the following factors:
Financial leverage gain: all company except company A have negative financial leverage gain, but the company C and D having an improving trend. On the other hand, company B’s leverage gain were falling from a positive number in 1999 to a negative value in 2002. This means the return on equity is deteriorate the cost of capital.
ROA: Company A, B and D reported a steady growth in ROA over the time period whereas company C had declining ROA over the time period and it