When analyzing Walgreen, an analyst defines “like companies” as companies that have the same value as Warlgreen for the following ratio: Market value of invested capital/ replacement cost of invested capital Question: Is the analyst correct about the defination of the"like companies"? If not, please give the reasons. Thanks
The analyst should do a top-down comps search: Industry - > sector -> etc…
but where can i find the defination for “like companies”? Is this ratio correct?
kate honestly no ideea all I can say by looking at that ratio - which I haven’t seen it before is that companies with same ratio must have similar capital structure I’m on air too
thanks for your reply.
I would interpret like companies as companies within the same industry (eg CVS, Rite-Aid, Snyders, etc.)
can they use this ratio to define “like companies”?
maybe JDV knows but you have to put the JDV sign on the sky so he knows he is needed
Isnt that the Tobin Ratio?
haha… Market value of invested capital/ replacement cost of invested capital Is this the Tobin Ratio?
i have never seen that ratio before, but it implies to me that a company with a high level of invested capital (like walgreens…think of all the real estate, store fronts, operations/logistics, etc) divided by and even higher level of replacement cost (real estate probably accumulated over many years, so replacement cost high, same thing for building out supply chain, etc)…so that would give us a ratio of less than 1. other large scale retail operations would have similar ratios/issues “like companies”, but so would ford and GM…the replacement cost there would definitely exceed invested capital, therefore ratio below 1…but not sure if that would make those “like companies”. but again, not sure how useful, or what this is getting at. sorry…this is kinda rambling to no where. in what context did you see this question?
Yeah, it’s Tobin Ratio. But I don’t know 1.when to use Tobin Ratio? 2.can we define “like companies” by using Tobin Ratio?
Tobin’s gets a brief mention in the Residual Income Section of CFAI Text (Volume 4, Reading 49, p 516). I don’t remember seeing it in Schweser. Formula is: Mkt Value of Debt & Equity / Replacement Cost of Total assets. Defined as similar to P/B; expect ratio to be higher, the greater a company’s asset productivity. Limitation is that difficultto determine replacement costs. In terms of defining like companies…yes, suppose it could be an additive measure in a comparables analysis. but in my opinion, other measures would be more useful. Since its in the text, suppose its fair game on the exam (and thanks to you, if i see it, at least i will know what to do!!). But seems pretty obscure, so perhaps low odds of it being tested.