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Retail Store Management

Notes a company is worth at any point in time because it takes into account the actual stock price

instead of balance sheet prices. When analysts say that a company is a “billion dollar” company,
they are often referring to its total enterprise value. Enterprise Value fluctuates rapidly based on
stock price changes.
EV to Sales: This ratio measures the total company value as compared to its annual sales. A high
ratio means that the company’s value is much more than its sales. To compute it, divide the EV
by the net sales for the last four quarters. This ratio is especially useful when valuing companies
that do not have earnings, or that are going through unusually rough times. For example, if a
company is facing restructuring and it is currently losing money, then the P/E ratio would be
irrelevant. However, by applying a EV to Sales ratio, you could compute what that company
could trade for when its restructuring is over and its earnings are back to normal.
EBITDA: EBITDA stands for earnings before interest, taxes, depreciation and amortization. It is
one of the best measures of a company’s cash flow and is used for valuing both public and
private companies. To compute EBITDA, use a company’s income statement, take the net income
and then add back interest, taxes, depreciation, amortization and any other non-cash or one-
time charges. This leaves you with a number that approximates how much cash the company is
producing. EBITDA is a very popular figure because it can easily be compared across companies,
even if all of the companies are not profitable.
EV to EBITDA: This is perhaps one of the best measurements of whether or not a company is
cheap or expensive. To compute, divide the EV by EBITDA (see above for calculations). The
higher the number, the more expensive the company is. However, remember that more expensive
companies are often valued higher because they are growing faster or because they are a higher
quality company. With that said, the best way to use EV/EBITDA is to compare it to that of other
similar companies.

Self Assessment

Fill in the blanks:

1. Stock ................................. is the method of calculating theoretical values of companies and
their stocks.
2. Stock valuation based on fundamentals aims to give an estimate of their .................................
value of the stock.
3. Stock valuation is not a ................................. but a .................................
4. The fundamental valuation is the valuation that people use to justify .................................

5. The most common example of valuation methodology is P/E ratio, which stands for
.................................

Caselet The Valuation of Business Division: The Case of
L&T Concrete

n 15 May 2008 Larsen & Turbo Limited (L&T) sold its ready mix concrete (RMC)
business, L&T Concrete to Lafarge India for INR 14.8 billion. The sale was affected
Othrough a transfer of business along with all assets, liabilities and the employees
connected with the RMC Business. The price of RMC business seemed to be quite low
considering its position in RMC segment with a market share of 25%, having assets of
Contd....

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