Damodaran on Valuation_ Security Analysis for Investment and Corporate Finance ( PDFDrive )

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Foramorecompleteexaminationoftherelationshipbetween
EV-to-sales ratios and after-tax operating margins, we
regressed theformeragainstthelatterforthefirms inthis
sector:


Thisregressioncanbeusedtoestimatepredictedenterprise
value-to-salesratios forany of thefirms in the group.To
illustrate,YuleCatto,withan after-taxoperating marginof
1.99%, will have a predicted EV/sales ratio of 1.22:


AtitsactualEV/salesratioof1.07,YuleCattoisundervalued
by approximately 12.1%.


Thisanalysiscanbeexpandedtocoverothervariables that
shouldaffectenterprisevaluemultiples.Therearesignificant
differences in financial leverageacross these firms, which
maymakesomeofthefirmsriskierthanothers.Tocapture
thiseffect,weestimatedtheinterestcoverageratioforeach
firm and added thevariable to the regression. Firms with
higherinterestcoverageratiosshouldbesaferthanfirmswith
lower interest coverage ratios, and trade at higher multiples:


TheR-squaredofthisregressionis84.68%,andusingitto
estimateapredictedEV/salesratioforYuleCattoyieldsthe
following predicted value:

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