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: