35053243 Chapter 7 Case Valuation Ratios In The Restaurant Industry
Valuation Ratios in the Restaurant Industry
1. Drivers of price-to-book equity and price-to-earnings multiples include:
a. Company’s profit margins, that is, the entity’s ability to generate abnormal earnings. These are in turn driven by industry performance and maturity; mature industries are saturated and firms experience low growth rates and ROE. Profit margins are also driven by rivalry within the industry, where low competition means that the company can expect a larger market share and larger profits. As the industry matures, strong reported multiples are expected to decline as they revert to mean as more competitors join.
b. Company’s strategy, including its financial strategy, which determines whether the company invests equity in positive valued projects that exceed the cost of capital, which will boost the equity value-to-book multiple. The effectiveness of the financial strategy can be evaluated by a number of factors including financial leverage. The company’s strategy also affects its perceived risk, which drives the price-to-earnings multiple.
c. Operational efficiency, which is largely determined by the firm’s asset utilization, is a component of the ROA calculation, which is a profitability ratio. A high ROA generally indicates the company’s ability to convert its investments into profits, and will usually translate into a high ROE. This will boost both multiples values.
d. Future growth prospects including expected earnings growth, which affects future ROE, which is used in the calculation of the equity value-to-book multiple. The future earnings of a company are expected to be high (low) due to its future growth potential, which may be predicted by numerous indicators including the sales growth rate.
2. Price-to-book equity valuation multiples for the four companies are as follows: Restaurant
Price/Book Value
A
4.4
C
3.9
D
1.0
B
1.0 My reasoning for the matches is based on the financial leverage trend. All companies but A
1. Drivers of price-to-book equity and price-to-earnings multiples include:
a. Company’s profit margins, that is, the entity’s ability to generate abnormal earnings. These are in turn driven by industry performance and maturity; mature industries are saturated and firms experience low growth rates and ROE. Profit margins are also driven by rivalry within the industry, where low competition means that the company can expect a larger market share and larger profits. As the industry matures, strong reported multiples are expected to decline as they revert to mean as more competitors join.
b. Company’s strategy, including its financial strategy, which determines whether the company invests equity in positive valued projects that exceed the cost of capital, which will boost the equity value-to-book multiple. The effectiveness of the financial strategy can be evaluated by a number of factors including financial leverage. The company’s strategy also affects its perceived risk, which drives the price-to-earnings multiple.
c. Operational efficiency, which is largely determined by the firm’s asset utilization, is a component of the ROA calculation, which is a profitability ratio. A high ROA generally indicates the company’s ability to convert its investments into profits, and will usually translate into a high ROE. This will boost both multiples values.
d. Future growth prospects including expected earnings growth, which affects future ROE, which is used in the calculation of the equity value-to-book multiple. The future earnings of a company are expected to be high (low) due to its future growth potential, which may be predicted by numerous indicators including the sales growth rate.
2. Price-to-book equity valuation multiples for the four companies are as follows: Restaurant
Price/Book Value
A
4.4
C
3.9
D
1.0
B
1.0 My reasoning for the matches is based on the financial leverage trend. All companies but A