Dividing both sides of theequation by the book value of
capital, we obtain the following:
Wesubstitutethefollowingproxiesforreturnoncapitaland
reinvestment into this equation:
The EV/book capital ratio can now be written as:
Inotherwords,themultipleofbookcapitalthatafirmtrades
atwillbeanincreasingfunctionoftwovariables—theexcess
returnthatthefirmearnsonitscapitalinvested(ROCminus
cost of capital) and the expected growth rate.
To analyzevalue-to-salesmultiples,we repeatthe process,
again starting with the stable-growth firm valuation model:
Dividing both sides by the revenues, we obtain: