–Value/Replacement Cost (Tobin’s Q)
3.Revenues generated by the asset –Price/Sales per Share (PS) –Value/Sales 5.Asset or Industry Specific Variable , specific to the industry make analysis relevant. –Price/kwh –Price per ton of production –Price per subscriber –Price per click –In PR industry – pricing based on coverage –Pb with sector specific multiples – One needs to be careful if industry is mis priced
We really want relationship to cash flows!!!
Comparisons which matter in Valuation
– We cannot compare profit margins ((NP margin / Gross Profit Margin)) across industries because profit margins is useful for comparing companies within an industry and not across. .– However we can compare (ROE or ROIC) across industries since ultimately investors and entrepreneurs chase return on investments, it makes sense to compare them across industries.
.– But investments need not necessarily be made into the industries with highest RoE. Both RoE as well as the quantum of capital that can be deployed have to be studied.
– Similarly if two companies in the same industry have different depreciation policies and operate in different tax environments, it makes sense to use EBIT(1-t) to factor in (remove) the tax impact / depreciation impact and then compare . – This will also imply that cost of total capital should be compared to RoIC and cost of equity to RoE and the two should not be mixed and matched More information and an Interesting note on relative valuation here