Franchise P/E


DEFINITION of 'Franchise P/E'

The expected value of new business opportunities available to a business. The franchise approach to evaluating a company breaks down the company's observed P/E into two primary components: the P/E coming from the company's business activities (base P/E) and the franchise P/E. In this sense, the franchise P/E = observed P/E - base P/E. It is a function of the rate of return on a business opportunity (the franchise factor) relative to the size of the opportunity (the growth factor).

Franchise Factor (FF) x Growth Factor (G) = (1/k - 1/ROE) x g/(k-g), where:

k = cost of equity
g = growth


The major factors determining the franchise P/E are the differences between the return on the new opportunity and the cost of equity. Investors should consider the growth rate and how long growth can be sustained, as well as the feasibility of the estimates (after all, they are expectations and not reality).

  1. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing ...
  2. Market Value

    The price an asset would fetch in the marketplace. Market value ...
  3. Earnings Per Share - EPS

    The portion of a company's profit allocated to each outstanding ...
  4. Franchise Factor

    The measurement of the impact on a company's price-earnings (P/E) ...
  5. Trailing Price-To-Earnings - Trailing ...

    The sum of a company's price-to-earnings, calculated by taking ...
  6. Forward Price To Earnings - Forward ...

    A measure of the price-to-earnings ratio (P/E) using forecasted ...
Related Articles
  1. Investing Basics

    Analyze Investments Quickly With Ratios

    Make informed decisions about your investments with these easy equations.
  2. Markets

    Relative Valuation Of Stocks Can Be A Trap

    This method of valuing a company can make it look like a bargain when it is not.
  3. Markets

    The 4 Basic Elements Of Stock Value

    Investors use these four measures to determine a stock's worth. Find out how to use them.
  4. Investing Basics

    How To Find P/E And PEG Ratios

    If these numbers have you in the dark, these easy calculations should help light the way.
  5. Forex Education

    How To Use The P/E Ratio And PEG To Tell A Stock's Future

    While the price-to-earnings ratio is commonly used for assessing stock prices, the price/earnings-to-growth ratio offers forecasting advantages that investors need to know.
  6. Budgeting

    The P/E Ratio: A Good Market-Timing Indicator

    Check out the returns this newer technical analysis tool would've yielded over the period from 1920 to 2003.
  7. Stock Analysis

    Coca-Cola Vs. PepsiCo: Which Stock Should You Buy?

    Learn about the bull case for Coca-Cola and PepsiCo. Find out which is more attractive for investors, and learn about the strengths of each company.
  8. Investing

    2 Sectors to Explore When Rates Rise

    While the market selloff and declining inflation expectations have lowered the probability of a Fed rate rise, U.S. economic data still supports it.
  9. Mutual Funds & ETFs

    ETF Analysis: PowerShares FTSE RAFI US 1000

    Find out about the PowerShares FTSE RAFI U.S. 1000 ETF, and explore detailed analysis of the fund that invests in undervalued stocks.
  10. Stock Analysis

    3 Reasons to Short Monster Beverage

    Learn why, despite the popular perception of Monster Beverage as a high-growth stock, investors may be better off taking a short position on it.
  1. How can EV/EBITDA be used in conjunction with the P/E ratio?

    Because they provide different perspectives of analysis, the EV/EBITDA multiple and the P/E ratio can be used together to ... Read Full Answer >>
  2. What is the average price-to-earnings ratio in the retail sector?

    According to NYU's Stern School of Business, as of January 2015, using trailing 12-month data, the average price-to-earnings ... Read Full Answer >>
  3. What metrics are commonly used to evaluate companies in the retail sector?

    Some of the most commonly used metrics to evaluate companies in the retail sector include the price/earnings to growth (PEG) ... Read Full Answer >>
  4. What is the average price-to-earnings ratio in the food and beverage sector?

    The food and beverage sector includes diverse groups of companies specializing in producing different foods and beverages ... Read Full Answer >>
  5. What is the average price-to-earnings ratio in the automotive sector?

    As of January 2015, the current price-to-earnings, or P/E, ratio was 15 for auto manufacturers and 20 for auto parts manufacturers. ... Read Full Answer >>
  6. What is the formula for calculating the price-to-earnings (P/E) ratio in Excel?

    The price-to-earnings ratio, or P/E ratio, is a valuation ratio used in fundamental analysis. The ratio compares a company's ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Purchasing Power

    The value of a currency expressed in terms of the amount of goods or services that one unit of money can buy. Purchasing ...
  2. Real Estate Investment Trust - REIT

    A REIT is a type of security that invests in real estate through property or mortgages and often trades on major exchanges ...
  3. Section 1231 Property

    A tax term relating to depreciable business property that has been held for over a year. Section 1231 property includes buildings, ...
  4. Term Deposit

    A deposit held at a financial institution that has a fixed term, and guarantees return of principal.
  5. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s loss, so that the net change in wealth or benefit is zero. ...
  6. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!