the Book Value Multiple and Net Income Multiple are measures of equity performance

The Book Value Multiple and Net Income Multiple are measures of equity performance Ali Alshebil

Prof. Munson

Comprehensive case (Part 4D)

Market Multiples


The value of Costco stock using the various market multiples can be summarized as follows:

Method $ Per Share
NOA Multiple $46.05
BV Multiple $65.32
NOPAT Multiple $84.59
NI Multiple $77.42


The Book Value Multiple and Net Income Multiple are measures of equity performance. These values reflect the equity value of a company. Whereas the Net Operating Asset Multiple and NOPAT Multiple reflect are measures that reflect the company performance. The value of BV multiple and NI multiple are compared to the market capitalization of the stock of the comparable companies whereas the NOPAT Multiple and NOA multiple are compared to the assumed company value. Another reason for the difference is that where NOA and BV multiples are based on the value of assets of the company, the NOPAT and NI multiples are based on the income and profits of the company. The first two measures show the value generating capacity of the current and total net assets respectively. These reflect the amount of money the assets of the company are worth as perceived by the market. These reflect the amount the shareholders are willing to pay for the assets of the company. The NOA reflects the value of operating assets and Book Value represents the value of total net assets. And the latter two measures reflect the valuation based on the future earning capacity of the company as perceived by the market.  The NOPAT reflects the amount of profit earned for all the providers of capital and the value generated by the NOPAT multiple reflects the amount that the providers of capital would be willing to pay for a share in the profits of the company. NI Multiple is a similar measure the only difference being that it measures the earnings expected by the equity shareholders of the company.  (Easton, McAnally and Sommers)

The values are in the range of $46.05 to $84.59 and at the same time the market price is $111.87. This implies that the valuation of the stocks using the market multiples are overvalued as compared to the current market price. The major reason for these differences is that the multiples are derived from the data of the comparable company’s data. The degree of comparability and similarity between the companies chosen to act as proxies play a crucial role. Further, the multiples are based on Net Operating Assets, Book Value, NOPAT and Net Income which are all accounting measures. The accounting policy used has a huge impact on the valuation using these measures. For example, if the company uses the accounting policy of valuing assets at historical cost and not the current market value, then this method would not truly reflect the value of the company. Necessary changes need to be made in the accounting figures before adopting these measures. In the information age, one of the most important assets any company possesses is information. These are usually in the form of intangible assets and are not recognized in the books of accounts. This is one of the possible reason which would lead to the undervaluation of the share price derived using market multiples. The current market price would depend on factors other than accounting figures. It would depend on the expectation of the investors about the future earning capacity of the company which would reflect in the demand and supply for the shares of the company. This would affect the current market price of the stock.   (Suozzo, Cooper and Sutherland)

Since the valuation as per the market multiples is less than the current market price, it means that the stock is overvalued and it would be suggested that the stock should not be purchased.


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