a firmthattradesata lowenterprise value-to-book capital
ratio; if the returnon capital is negative orvery low, we
wouldconsiderthattobeareasonableexplanationforwhy
theenterprisevalue-to-capitalratioissolow.Thelimitation
ofthis approachisthatonlythemost obviouslymisvalued
securities willthencomethrough this processasunder- or
overvalued.Withmostfirms,afterall,therewillbeatleast
onevariablethatpotentiallycouldexplainwhythemultipleis
higher or lower than the industry average.
Matrix Approach
In the matrix approach, we plot the multiple that we are
analyzing against its companion variable. Applied to the
ratiosofenterprisevaluetoinvestedcapital,forinstance,we
would plot the multiple against the after-tax return on
invested capital as shown inFigure 9.6.
FIGURE 9.6 Valuation Matrix: Value-to-Book Ratio and
Excess Returns