Yule Catto carries more debt thanthe typical firm in the
sector with an interest coverage ratio of 2.12, and after
adjustingforthathigherfinancialleverage(withtheinterest
coverage ratio) the firm is overvalued by 20.5%.
Market Comparisons
Sector comparisons are useful in analyzing whether a
companyisunder-orovervalued,relativetoothercompanies
initssector,buttheydonotanswerthebroaderquestionof
whetheracompanyisunder-orovervaluedrelativetoother
companiesinthemarket.Comparingcompaniesindifferent
businesses,withdifferentrisk,growth,andcashflowprofiles,
mayseemlikeanexerciseinfutility,butitcannotonlybe
done, it can also provide insight, especially when entire
sectorsgetmisvalued.Inthissection,weexaminehowvalue
multiplesvaryacrossthemarketandthevariablesthatseem
to best explain the differences across companies.
EV/Operating Income Multiples
Thefirstmarketregressionsthatwepresentrelateenterprise
valuetooperatingincomeandarecomputedusingdataonall
publicly traded companies in the UnitedStates in January
2006.BeginningwiththeEV/EBITmultiple,weestimatethe
following regression, using thetax rate, reinvestment rate,
andexpectedgrowthrateinrevenues(estimatedbyanalysts)
over the next five years (g) as independent variables: