# ps - Revenue Multiples Aswath Damodaran Aswath Damodaran 1...

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Aswath Damodaran 1 Revenue Multiples Aswath Damodaran

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Aswath Damodaran 2 Price Sales Ratio: Definition n The price/sales ratio is the ratio of the market value of equity to the sales. n Price/ Sales= Market Value of Equity Total Revenues n Consistency Tests The price/sales ratio is internally inconsistent, since the market value of equity is divided by the total revenues of the firm.
Aswath Damodaran 3 PS Ratios: The Inconsistency Test n Assume that you are comparing price/sales ratios across firms in a sector, and that there are differences in financial leverage across firms. What type of firms will emerge with the lowest price/sales ratios? o Low Leverage Firms o Average Leverage Firms o High Leverage Firms

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Aswath Damodaran 4 Price/Sales Ratio: Cross Sectional Distribution PS RATIO 1400 1200 1000 800 600 400 200 0 Std. Dev = 2.55 Mean = 1.87 N = 4634.00
Aswath Damodaran 5 Price/Sales Ratio: Determinants n The price/sales ratio of a stable growth firm can be estimated beginning with a 2-stage equity valuation model: n Dividing both sides by the sales per share: P 0 = DPS 1 r - g n P 0 Sales 0 = PS= Net Profit Margin*Payout Ratio*(1 + g n ) r-g n

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Aswath Damodaran 6 Price/Sales Ratio for High Growth Firm n When the growth rate is assumed to be high for a future period, the dividend discount model can be written as follows: n Dividing both sides by the sales per share: where Net Margin n = Net Margin in stable growth phase P 0 = EPS 0 *Payout Ratio*(1+g)* 1 - (1+ g) n (1+r) n r - g + EPS 0 * Payout Ratio n *(1+g) n *(1+g n ) (r-g n )(1+ r) n P 0 Sales 0 = Net Margin *Payout Ratio* (1+g)* 1 - (1+g) n n r - g Net Margin n * Payout Ratio n n *(1 + g n ) (r - g n )(1 + r) n
Aswath Damodaran 7 Price Sales Ratios and Profit Margins n The key determinant of price-sales ratios is the profit margin. n A decline in profit margins has a two-fold effect. First, the reduction in profit margins reduces the price-sales ratio directly. Second, the lower profit margin can lead to lower growth and hence lower price-sales ratios. Expected growth rate = Retention ratio * Return on Equity = Retention Ratio *(Net Profit / Sales) * ( Sales / BV of Equity) = Retention Ratio * Profit Margin * Sales/BV of Equity

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Aswath Damodaran 8 Price/Sales Ratio: An Example High Growth Phase Stable Growth Length of Period 5 years Forever after year 5 Net Margin 10% 6% Sales/BV of Equity 2.5 2.5 Beta 1.25 1.00 Payout Ratio 20% 60% Expected Growth (.1)(2.5)(.8)=20% (.06)(2.5)(.4)=.06 Riskless Rate =6% PS = 0.10 * 0.2 * (1.20) * 1 - (1.20) 5 (1.12875) 5 (.12875 - .20) + 0.06 * 0.60 * (1.20) 5 * (1.06) (.115-.06) (1.12875) 5 = 1.06
Aswath Damodaran 9 Effect of Margin Changes Price/Sales Ratios and Net Margins 0 0.2 0.4 0.6 0.8 1 1.2 1.4 1.6 1.8 2% 4% 6% 8% 10% 12% 14% 16% Net Margin PS Ratio

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Aswath Damodaran 10 PS/Margins: Greek Retailers Company PS Net Margin SPAKIANAKIS SA 0.25 2.88% KOTSOVOLOS SA 0.48 1.91% SANYO HELLAS 1.12 5.07% IMAGE-SOV2VD SA 1.31 2.86% GERMAN0S 1.49 6.94% ELEKTRONIKI 1.61 6.29% JUMBO 1.68 6.08% PHiLIPPOS NAKAS 1.71 5.04% GOODY'S 2.24 6.77% HELLENIC DUTY 5.60 19.49% AS COMPANY 7.02 8.23% FOLLI-FOLLIE 10.82 29.08%
Aswath Damodaran 11 Regression Results: PS Ratios and Margins n Regressing PS ratios against net margins, PS = -.10 + 36.29 (Net Margin)

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## ps - Revenue Multiples Aswath Damodaran Aswath Damodaran 1...

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