At 5.6 times EBITDA, the firm is overvalued.
ILLUSTRATION 9.4: Comparing EV/Capital Ratios
Inthelastcolumn,wereporttheafter-taxreturnoncapital
earned by the firms in the sector.
Even a casual perusal of thetable suggests a relationship
betweenEV/capitalandthereturnoncapital,withlowreturns
oncapitaltiedtolowenterprisevalue-to-capitalratios.Ifwe
defineanundervaluedfirmasonethathasalowenterprise
value-to-bookcapitalratiowhilemaintainingahighreturnon
capital, a simple screening device would be to treat as
undervalued only companies thattrade atEV/capital ratios
thatarelower thantheaverage forthesector(3.52) while
maintaining returns on capital that exceed the industry
average (15.02%). Using that measure, only Sarantis and
ChristianDiorpassthetest;theformertradesatanenterprise
value-to-sales ratio of 2.22 whilemaintaining a return on
capital of 21.29%, whilethe latter trades at an enterprise