Franchise Factor

DEFINITION of 'Franchise Factor'

The measurement of the impact on a company's price-earnings (P/E) ratio per unit growth in new investment. For example, a franchise factor of 3 would indicate that the P/E ratio of a company would increase by three units for every unit of growth in the company's book value.

The franchise factor can be calculated as the product of annual investment returns in excess of market returns and the duration of the returns. A P/E ratio will not be elevated with a high franchise factor alone.

BREAKING DOWN 'Franchise Factor'

A company with a high franchise factor will have exceptionally high P/E ratios in comparison to its book value. This comes from the ability to continually capitalize on basic strengths, rather than the financial strength of the business. Because this is the case in many franchises, the term "franchise factor" was developed.

RELATED TERMS
  1. Franchise P/E

    The expected value of new business opportunities available to ...
  2. Franchise

    A type of license that a party (franchisee) acquires to allow ...
  3. Franchiser

    A party in a franchising enterprise that ultimately owns the ...
  4. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing ...
  5. P/E 30 Ratio

    The price-to-earnings (P/E) ratio is the valuation ratio of a ...
  6. Franchise disclosure document

    A Franchise Disclosure Document (FDD) is a legal document presented ...
Related Articles
  1. Stock Analysis

    Diamond in the Rough? U.S. Franchises in 2016 (MCD, DNKN)

    Learn about U.S. franchise growth and direction for 2016 and how changes in wage standards and consumer preferences may endanger large fast food chains.
  2. Investing Basics

    When Is A Franchise The Right Investment For You?

    Do you have the right mix of credit, capital and business savvy to make you an ideal candidate for buying a franchise?
  3. Entrepreneurship

    Franchise vs. Startup? How to Decide

    For you, self-employment is definitely the name of the game. But which route is better: opening a franchise or starting a business from scratch?
  4. Entrepreneurship

    Is Buying A Franchise Wise?

    Before you dive headfirst into buying a franchise, you might want to stop and think.
  5. Entrepreneurship

    6. A Creative Black Hole

    Buying a franchise may not be all that it's cracked up to be. Find out why.
  6. Entrepreneurship

    Is Buying A Franchise Wise?

    If you like being your own boss, this is not the job for you.
  7. Entrepreneurship

    Top 7 Franchise Dangers

    Buying a franchise may not be all that it's cracked up to be. Find out why.
  8. Professionals

    The Income Statement: Key Ratios

    FINRA/NASAA Series 65 - The Income Statement: Key Ratios. In this section interest coverage ratio, price-earnings ratio and price to book ratio.
  9. Entrepreneurship

    1. Frightening Franchise Fees

    Buying a franchise may not be all that it's cracked up to be. Find out why.
  10. Fundamental Analysis

    How Do I Calculate the Price-Earnings Ratio?

    If Apple is trading at $108.73 per share, and its trailing twelve months' EPS is $6.45, calculate the P/E ratio as...
RELATED FAQS
  1. What does the forward p/e indicate about a company?

    Explore the forward price to earnings ratio and learn its significance and how it compares to the traditional price to earnings ... Read Answer >>
  2. What is the average price-to-earnings ratio in the banking sector?

    Explore the price/earnings ratio in regard to the banking industry and learn what the average P/E ratio is for most banking ... Read Answer >>
  3. How do I calculate the P/E ratio of a company?

    Find out how to calculate this common valuation ratio and what the results can tell you about a company's performance. Read Answer >>
  4. How can the price-to-earnings (P/E) ratio mislead investors?

    A low P/E ratio doesn't automatically mean a stock is undervalued, just like a high P/E ratio doesn't necessarily mean it ... Read Answer >>
  5. What does it mean if a bond has a zero coupon rate?

    Learn what the average range for the price to earnings (P/E) ratio in the electronics sector is and which factors influence ... Read Answer >>
  6. What is an alternative ratio to forward p/e?

    Discover the most commonly used alternative equity evaluation ratio to the forward P/E ratio, and the relative advantages ... Read Answer >>
Hot Definitions
  1. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  2. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  6. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
Trading Center