Inthiscase,cashtradesatalowerprice-to-bookratiothanthe
operatingassetsdo,andthepresenceofcashwillpushdown
theprice-to-bookratioforthefirm.Ofcourse,thereversewill
occurinfirmswhereoperatingassetsgeneratesubparreturns
andtradeatbelowbookvalue.Hereagain,thesolutiontothe
problemistonetcashoutofboththemarketvalueandbook
value of equity when computing price-to-book ratios.
Thefailuretodealwithcashexplicitlyinrelativevaluationis
becomingalargerandlargerissueascashholdingsdiverge
across firms even within the same sector.
Firm and Enterprise Value Multiples
Ingeneral,analystshavebeenmorecognizantoftheeffects
ofcashwhenusingfirmvaluemultiples.AsnotedinChapter
9,mostanalystsuseenterprisevalue,whichnetscashoutof
the market value of debt and equity, to compute these
multiples. Since thedenominator is usually a variation of
operatingincome(EBITDA,after-taxoperatingincome),the
resultingmultiple shouldnot beaffectedby cashholdings.
Thereare twoareas,though, where analystshaveto show
caution: