value paid for each acquisitionand the difference
between the market value and book value of the
acquiredcompanyasgoodwill;thegoodwillcanbe
considered to be a premium paid for the growth
assets of the acquired company.
3 In practical terms, this will mean that the
price-to-book ratios of acquisitive companies will
generallylook lower (and more attractivefrom an
investment standpoint) than nonacquisitive
companies.- Revenue measures. There are many analysts who
dividethemarketvalueofequitybytherevenuesof
the firm to estimate a price-to-sales ratio. This
measureisinconsistent,sincerevenuesbelongtothe
entire firm and not just to its equity investors.
Notwithstanding this, analysts often prefer to use
price-to-salesratiostoenterprisevalue-to-salesratios
(whichwouldbemoreconsistent).Thereasonthey
maybeabletogetawaywith thispracticewithout
majorerrorscreeping intotheir analysismayliein
thesectorswheretheusageofthismultipleismost
common. One is technology, where firms tend to
havelittle orno debt,thusmaking firmvalueand
equityvaluealmostequivalent.Theotherisretailing,
where firms historically have maintained
homogeneous debt ratios (usually in the form of
operatingleases).Inbothsectors,though,changesare
under way that put this long-standing practice at risk.
TABLE 8.2Book Equity Measures and Equity Market Value