Operating Efficiency and Firm Valuation: Evidence from India

Abstract

We examine the impact of operating efficiency on firm valuation. The study spans ninety firms spread over six major industrial sectors in India from 2005 through 2012. Six key ratios are considered for their possible impact on the enterprise value. Through panel data analysis, we find that gross profits, return on capital employed asset turnover and to some degree, sales have a significant impact on the enterprise value at the inter-industry level. In the collective sample, all six ratios pertaining to operating efficiency and profitability have a significant effect on enterprise value. We also note that with the infrastructure sector as the reference point, the role of banking sector is significantly positive in value creation. Further, value creation is more attendant to present performance rather than what might have happened in the past.

Keywords: Operating efficiency, Panel Data Analysis, EV/EBITDA, Enterprise Value, Firm Value