Basic GMAT Commentary On This Valuation Multiple Scatter Plot and Regression Chart (Integrated Reasoning)
This is GMAT integrated reasoning question uses some financial terminology like "enterprise value" and "return on capital" - terms that might ordinarily be used in the financial services industry - particulary by managers and investment bankers. But don't be scared away! Chances are, you'll get to see a lot of these terms and concepts thrown around in business school. For the purposes of the GMAT, you won't need to understand how they fit in with the financial health of a company - but you will need to be able to understand them in the context of a basic scatterplot with a regression line as shown in this chart.
Here in this chart we see the return on capital as a percentage plotted against the enterprie value to capital ratio. The dotted line is used as a basis of comparison. The slope of the EV/EBIT line is given as 8.0x.
This tells us that any data set that would fit along this estimated regression line would effectively have an EV/EBIT ratio of 8.0x.
In general, different industries have a different EV/EBIT ratio. In other words, two companies with the same earnings can have a different ratio because they are in different industries.
A company in a slow-growing industry might command a lower multiple of that ratio than a company with similar earnings but in a faster-growing industry.
Dot-coms and internet companies are typically valued a higher multiple than service-based businesses or brick-and-mortar companies, which typically don't have the same kind of leverage and scale that internet companies have. Hence, the difference in the multiple shown in the chart here.
source: GMAT Pill - ScatterPlot with Regression
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