Valuation-Ratios-in-the-Restaurant-Industry - Valuation...

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Valuation Ratios in the Restaurant Industry 1. Drivers of price-to-book equity and price-to-earnings multiples include: a. Company’s profit margins , that is, the entity’s ability to generate abnormal earnings. These are in turn driven by industry performance and maturity; mature industries are saturated and firms experience low growth rates and ROE. Profit margins are also driven by rivalry within the industry, where low competition means that the company can expect a larger market share and larger profits. As the industry matures, strong reported multiples are expected to decline as they revert to mean as more competitors join. b. Company’s strategy, including its financial strategy, which determines whether the company invests equity in positive valued projects that exceed the cost of capital, which will boost the equity value-to-book multiple. The effectiveness of the financial strategy can be evaluated by a number of factors including financial leverage. The company’s strategy also affects its perceived risk, which drives the price-to-earnings multiple. c. Operational efficiency , which is largely determined by the firm’s asset utilization, is a component of the ROA calculation, which is a profitability ratio. A high ROA generally indicates the company’s ability to convert its investments into profits, and will usually translate into a high ROE. This will boost both multiples values.
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This note was uploaded on 07/31/2010 for the course ACFI 953 taught by Professor Mike during the Spring '10 term at Adelphi.

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Valuation-Ratios-in-the-Restaurant-Industry - Valuation...

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