Valuation Ratios in the Restaurant Industry Case Study

Group Name: The Analytical

Members

Feb 6, 2012

(Kathy) Chung Kai Wai: ky_kathy@hotmail.com

(Neko)Wang Xiao Xiao: nekowang772@gmail.com

(Vicky) Zhu Xiao: zhuxiao0804@hotmail.com

(John)Leung Kwok Kit: john_erney@hotmail.com

(Yvonne)Lo Chung Min Yvonne: Yvonne@yloevents.com

Team Leader: Yvonne Lo

Valuation Ratios in the Restaurant Industry Case Report #1

1. What do you expect to drive a company's price-to-book equity and price-to-earnings multiples?

The formula of price-to-book equity is:

Stock price per share/ Book Value per share(Total Asset-(intangible asset + total liability))

It is a ration that compare the book value of a company with it current stock price. An investor use this ratio to determine whether to invest in a company. If ratio is 2:1 it means the stock is worth two times as much as the net worth or the company. If this ratio is 100:1, that means the investor sees this stock as a stock with growth potential.

The value of P/B ratio is driven by it's stock prices and it's book value which is Total Asset-(intangible asset+total liabilities). The amount of Total asset that the company has is a big factor. The amount of liabilities and debt that a company carries also affects the P/B ratio. There are so many variables in the balance sheet that can affect the total asset of the company. Stock Prices is another important factor, what drives a stock price? It is a company's performance, reputation, growth potential and the demand of the company stock. It is what the market speculate the company can achieve. The performance can be measured by Profitability ratios such as Profit Margin, Operating Efficiency ratios and return on assets. Most of these ratios are related to total revenue and Net income. Therefore the overall health of a company can affect P/B ratio

The formula of price-to-earnings is:

Current market Price per share/Earning per share(earnings/total # of shares)EPS

It is a ratio to compares the market price and the earning of a company. It is often used to compare between two similar companies in the same industry. If the P/E Ratio is 30:1 that means an investor will pay $30 to $1 of earning of the company.

The value of P/E ratio is driven by the price per share and the Earning per share of the company. EPS has a lot of weigh to P/E Ratio. Earning per share is related