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FINANCIAL CHRONICLE™ » EXPERT CHRONICLE™ » Company Valuation Toolkit

Company Valuation Toolkit

Go down  Message [Page 1 of 1]

sriranga

sriranga
Co-Admin
Company Valuation Toolkit Busine10

Further to my previous posting The Basics of Valuing Companies,
http://forum.srilankaequity.com/t10053-the-basics-of-valuing-companies
Here I set out a basic toolkit of valuation measures.  So let's start with the familiar:

P/E Ratio
The price earnings ratio (P/E) is the price of a share divided by its earnings per share (EPS).  It is usually described as how many years of earnings are required to pay back the cost of buying a share, assuming no growth.
Another way of looking at the P/E ratio is that it is the reciprocal of earnings yield, which is EPS divided by the share price.  If a company has a P/E of 8, its earnings yield is 12.5% (100/Cool.  If it pays out 40% of its earnings each year in dividends, then its dividend yield will be 5.0% (40% x 12.5).
The P/E ratio is a ubiquitous measure of the rating of a share, and the simplest way of comparing two companies.  But it is vital to ensure that you are comparing like with like:
• P/Es can be historic (based on latest reported earnings), prospective (based on forecast earnings) or trailing twelve month.  If a company has reported interim results then its trailing twelve month P/E will be based on the earnings figure in the latest interims plus the last half of the previous year;
• If companies do not have coterminous year ends (e.g. if one has a year end on 30 June and another 31 December) then you need to compare the historic P/E of one with the trailing twelve month P/E of the other;
• Reported EPS figures can be basic, diluted and adjusted, so there are as many variants of the P/E ratio; and
• It can be safer to calculate the P/E yourself, on a per share basis or on a "whole company" basis as market capitalisation divided by earnings, which gives the same result.

P/E Relative
The P/E relative is simply a company's P/E divided by the market, or sector, average P/E.  
So if a company has a P/E of 10 and the sector has an average P/E of 8 then its P/E relative is 125% (10/Cool, meaning it is rated at a premium of 25%.

Dividend Yield
This is dividend per share divided by the share price. Dividend yield can also be historic, prospective or trailing twelve month, and similar cautions about comparing like with like apply.
Dividend yield is intrinsically linked to earnings yield, and hence P/E ratio, through the payout ratio, the proportion of earnings paid as dividends rather than reinvested in the company.
A company can set the level of its dividend by varying the payout ratio. So dividend yield should always be considered in the context of the dividend cover, or EPS divided by its dividend per share. This shows how comfortably a company can afford to pay its dividend. Dividend cover is the reciprocal of the payout ratio.

PEG Ratio
The PEG ratio is calculated as the P/E ratio divided by the forecast growth in earnings.
It attempts to measure how much investors are paying for the anticipated future growth, and is associated with the "growth at a reasonable price" investment style.
Sometimes it can be helpful to look at some other valuation metrics as well:

Price/Sales Ratio
This is calculated by dividing the share price by revenues per share, or dividing market cap by total revenues.
It can be very illuminating in comparing companies who are direct competitors, and is useful:
• In comparing companies with very different gearing, which distorts P/E ratios; and
• If there are no earning figures, e.g. the company has made losses or is a start-up.

Price/Book Value & Price/Tangible Assets
Price to book is calculated as share price divided by net assets per share (or market cap divided by net assets).  It is especially useful in specific sectors such as valuing banks, and gives an indication of how much substance underlies a company's market valuation.
Using only tangible assets is a harsher test of how much the valuation is backed by physical assets and is a useful "make sense" check as well as being associated with certain styles of investing.
Some analysts prefer to compare ratios based on a company's enterprise value (EV), which is its market capitalisation plus its outstanding debt (or long-term debt).

EV/EBITDA
EBITDA is earnings before interest, tax, depreciation and amortisation, and is operating profit (EBIT) with depreciation and amortisation added back.
This ratio is more robust in comparing companies which have very different capital structures and/or depreciation and amortisation policies.

EV/NOPAT
NOPAT is net operating profit after tax.  It equals earnings before interest payments are deducted, and so the ratio is analogous to the P/E ratio applied to debt holders and shareholders taken together.


Valuable comments are appreciated
Edited article from Investing Stratergy



Last edited by sriranga on Sun Mar 10, 2013 2:07 am; edited 1 time in total

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amilaela

Post Sat Oct 22, 2011 11:14 pm by amilaela

ela

greedy

Post Tue Apr 03, 2012 4:14 am by greedy

Price of Recent Investment/subscription is a good indication of fair value of a share. I had a laugh when Private Placements were very cheaper than the IPO price. If anyone had understood that Price of recent Investment is a good indication of fair value of a share, then he/she would not have subscribed to IPOs when IPO prices are significantly higher than PP price. When this method is used, one should also consider other methods of valuation, changes in the circumstances after recent investment, time period since the recent investment etc.

NAV is also a good valuation method for certain businesses. For example Companies with investment business & start up businesses.

"It can be safer to calculate the P/E yourself, on a per share basis or on a "whole company" basis as market capitalisation divided by earnings, which gives the same result."

Technically, I don't agree with this, because when there are different classes of shares (like voting and non voting shares) the answers would be different.


sriranga

Post Tue Apr 03, 2012 4:26 am by sriranga

@greedy wrote:Price of Recent Investment/subscription is a good indication of fair value of a share. I had a laugh when Private Placements were very cheaper than the IPO price. If anyone had understood that Price of recent Investment is a good indication of fair value of a share, then he/she would not have subscribed to IPOs when IPO prices are significantly higher than PP price. When this method is used, one should also consider other methods of valuation, changes in the circumstances after recent investment, time period since the recent investment etc.

NAV is also a good valuation method for certain businesses. For example Companies with investment business & start up businesses.

"It can be safer to calculate the P/E yourself, on a per share basis or on a "whole company" basis as market capitalisation divided by earnings, which gives the same result."

Technically, I don't agree with this, because when there are different classes of shares (like voting and non voting shares) the answers would be different.


Really appreciate your valuable feedback.
Thanks.

greedy

Post Tue Apr 03, 2012 4:53 am by greedy

Two more valuation methods for any business are;

1) Discounted cash flows or earnings of Underlying Business
2) Discounted cash flows from the investment.


P/E Ratio, EV/EBITDA, EV/EBIT, Price to Sales etc falls into one category called "Multiples"

sriranga

Post Tue Apr 03, 2012 4:58 am by sriranga

Thanks.

http://forum.srilankaequity.com/t12537-discounted-cash-flow-how-much-is-a-stock-really-worth?highlight=discounted+cash

greedy

Post Tue Apr 03, 2012 5:19 am by greedy

Thanks for the link... valuable post.

market bull

Post Tue Apr 03, 2012 5:49 am by market bull

Really good one.Thanks Sri ranga & Greedy

KDDND

Post Sun May 05, 2013 7:55 pm by KDDND

Thx Sri! Smile

avatar

Post Thu Jun 06, 2013 1:18 am by raezor

Great post !!! Thanks

jonny

Post Thu Jun 06, 2013 1:58 am by jonny

Valuable and educative post.Thanks SRIRANGA..Keep your good work up..

GREEDY thank you for your comments.. Very Happy

cseguide

Post Fri Jun 07, 2013 7:49 am by cseguide

thanks

avatar

Post Sun Nov 30, 2014 3:45 pm by zoozzoo

Great article Very Happy

piras

Post Sun Nov 30, 2014 3:55 pm by piras

Great post.

goldenboy

Post Sun Nov 30, 2014 4:04 pm by goldenboy

Great article.Thanks. Very Happy

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Post Thu Nov 19, 2020 8:55 am by Quibit

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