Valuation multiples A reading prepared by Pamela Peterson Drake James Madison University


 Lisa Reynolds
 1 years ago
 Views:
Transcription
1 Valuation multiples A reading prepared by Pamela Peterson rake James Madison University Table of Contents Introduction... 1 Understanding the use of multiples... 1 Identifying the comparables... 1 Choosing a multiple... 2 Priceearnings ratio... 3 Pricebook ratio... 4 Pricesales ratio... 5 Pricecash flow ratio... 6 PEG ratio... 6 Calculating the multiples... 7 Adjusting for differences in accounting... 7 Applying the multiples... 8 Issues multiples... 8 To average or not to average?... 8 Problems with the denominator... 9 The Moldovsky effect... 1 Summary For further information Index Updated: August 29
2 Introduction There are many approaches to valuing a company, a division, or any other business unit, including discounted cash flows methods and valuation multiples. The discounted cash flow methods require estimates of cash flows for a number of periods into the future, a discount rate that reflects the riskiness of these cash flows, and either an assumption regarding the growth rate of cash flows into the future or a terminal or horizon value of the business unit at some point in the future. The valuation multiples require selection of a comparable or comparable businesses units and a multiple or set of multiples for valuation, such as a priceearnings ratio. The focus of this reading is on the valuation multiples approach. Understanding the use of multiples The process of valuation using multiples requires the use of information on comparable firms, some adjustments to improve comparability, and then the application of the multiple derived from the comparable firms to the subject firm, as shown in Exhibit 1. This process will lead to an estimate of value for a company which is just that: an estimate. As you can see in Exhibit 1, this process involves a great deal of guesswork along the way, such that errors in estimates are compounded. A prudent approach is to use more than one multiple, evaluate the sensitivity of the estimates to the choice of comparables, and consider the amount of error that is present in the estimates. Identifying the comparables To make comparisons, the analyst most likely will want to compare the firm with other firms. But identifying the other firms in the same or similar lines of business presents a challenge. A system that has been used for many years for classifying firms by lines of business is the Standard Industrial Classification (SIC) system, which was developed by the Office of Management and Budget. However, starting in 1997, another classification system, North American Industry Classification System (NAICS) replaces SIC codes with a system that better represents the current lines of business. Using the NAICS, we can classify a firm and then compare this firm with other of that class. Classifying firms into industry groups is difficult because most firms have more than one line of business. Most large corporations operate in several lines of business. o we classify a firm into an industry by the line of business that represents: The most sales revenue generated? The greatest investment in assets? The greatest share of the firm's profits? Exhibit 1 Valuation using multiples Identify comparable firms and determine values from market data Adjust values for different accounting methods Calculate the multiple based on the comparable firms base and values Estimate the base of the multiple for the subject business unit or company Apply the multiple from the comparables to the subject business unit or company It is not clear which is the most appropriate method and a firm may be classified into different industries by different financial services and analysts. 1
3 When identifying comparables, it is important to identify, if possible, companies that are most similar according to a number of dimensions: Line of business and, specifically, products Asset size Number of employees Growth in revenues and earnings Cash flow Often, when we evaluate a company that is not publiclytraded, we are comparing a smaller company with larger, publiclytraded companies. Therefore, it is often difficult to match up the subject company with a similarsize company in terms of assets and number of employees. However, matching up on as many factors as possible is useful, especially with respect to the line of business. Consider the 25 fiscal year data of a company that is the subject of a valuation: Line of business Total assets Book value of equity Revenues Earnings Cash flow from operations Confectionary $3 million $2 million $6 million $9 million $11 million Growth in revenues 7% per year Growth in earnings 9% per year Number of employees 2,5 Now consider publiclytraded companies in the confectionary industry, using fiscal year 25 values: Hershey Tootsie Roll Wm. Wrigley Total assets $4,295.2 million $813.7 million $4,46.2 million Book value of shareholders equity $1,21.1 million $617.4 million $2,214.4 million Revenues $4,836. million $487.7 million $4,159.3 million Earnings $493.2 million $77.2 million $517.3 million Cash flow from operations $461.8 million $82.5 million $757.6 million Growth in revenues 5.5% 5.5% 9% Growth in earnings 1% 6.5% 1% Number of employees 4,523 1,95 43,555 Which firm is most comparable? Tootsie Roll is the smallest of the three possible comparables, but is it the most comparable in other dimensions? Should we take an average of the three companies values in some way? Should we restrict the comparables to U.S. companies, or should we expand the eligible companies to include Lindt & Sprüngli or Nestlé? While the choice of comparables is important, analysts will also examine the sensitivity of their valuation to the choice of the comparable and develop a range of estimates based on alternative comparables. Choosing a multiple There are a large number of multiples that an analyst can apply in a valuation situation. These multiples include the priceearnings ratio, the pricebook ratio, and the pricesales ratio. In addition, we may want to compare PEG ratios as well 2
4 Priceearnings ratio The priceearnings ratio, also referred to as the PE or P/E ratio, is simply the ratio of the market value of the stock to the earnings or net income: Market valueearnings ratio = Market value of equity Net income We can also restate the priceearnings ratio in the more familiar, but numerically equivalent, pershare basis as the ratio of the price of a share of stock to the earnings per share: Priceearnings ratio = Market price per share Earnings per share But it really is not as simple as that: o we use earnings for the most recent four quarters of earnings? This is referred to as the trailing PE. Or do we use forecasted earnings? This is referred to as the leading PE. The most important issue is that you are consistent. When you gather the information for the comparables, you should make sure that the multiples are determined in the same manner and then applied consistently to the subject company. For example, many analysts remove nonrecurring items from earnings before calculating this ratio so that we get a better picture of the underlying earnings of a company. When using priceearnings ratios calculated from a third party, it is important to understand how these ratios are calculated: Before or after extraordinary earnings? Leading or trailing earnings? The priceearnings ratio is considered useful in valuation because earnings are a primary driver in a company s value. In cases in which a company does not have positive earnings, however, the priceearnings ratio cannot be used, and in cases in which a company has volatile earnings, the priceearnings ratio as a multiple may not be very reliable. We can relate the priceearnings ratio to fundamental factors using the familiar dividend valuation model: 3
5 Let P = Price per share at time, t = ividend per share at the end of period t, g = Expected growth rate of dividends, and r = Required rate of return. Starting with the dividend valuation model, 1 (1+g) P = = rg rg Recognizing that the dividend payout ratio is substituting E for, E E, where E is earnings per share, and E (1+g) E P =. rg ividing by earnings per share, E, (1+g) ividend payout ratio (1+g) = =. E E rg rg P We see from this that the priceearnings ratio is related to the dividend payout ratio and the plowback ratio (which is the complement of the dividend payout ratio), expected growth, and the required rate of return. 1 Pricebook ratio The pricebook ratio, or pricetobook ratio, is the ratio of the market value of the equity to the book value of equity: 2 Market value of equity Market valuebook ratio = Book value of equity We can also phrase this in terms on a pershare basis as the ratio of the market price per share of a stock to the book value of equity per share: Market price per share Pricetobook ratio = Book value of equity per share This ratio is also known as the priceequity ratio. The ratio captures the value that investors place on the company s equity. In cases in which a company has negative earnings, and hence the priceearnings ratio is meaningless, the pricebook ratio may be used as long as equity is positive. However, because the book value of a company s assets will not often 1 The dividend payout ratio is the ratio of dividends to earnings. The plowback ratio, representing the proportion of earnings reinvested into the firm, is one minus the dividend payout ratio. 2 The book value of equity in these ratios refers to common shareholders equity, which is total shareholders equity less any preferred stock equity. Some analysts use only tangible book equity, which is the book value of common equity less the book value of intangibles assets. 4
6 be equivalent to the true value of its assets, this ratio may not be very meaningful for some companies. For example, pharmaceutical companies have many patents on drugs, the value of which is not reflected in the book value of assets and, hence, the book value of equity. For investors who use a strategy of value investing, this ratio is often used to identify firms: low pricetobook stocks are typically viewed as underpriced value stocks. However, this may not be a correct assessment because companies with financial problems often have low pricetobook ratios. We can relate the pricebook ratio to fundamental factors using the familiar dividend valuation model: Starting with the dividend valuation model, 1 (1+g) P = = rg rg Recognizing that the dividend payout ratio is substituting E for, E E, where E is earnings per share, and P= E (1+ E rg g). ividing by the book value of equity per share, B, E (1+g) Return on equity (1+g) = =. B E E B rg rg P We see that the pricebook ratio is related to the fundamentals of the return on equity (earnings divided by the book value of equity), the plowback ratio, the expected growth rate, and the required rate of return. Pricesales ratio The pricesales ratio, or pricetosales ratio or PSR, is the ratio of the market value of the equity to the company s revenues for the period: Market valuesales ratio = Market value of equity Revenues We can also phrase this in terms on a pershare basis as the ratio of the market price per share of a stock to the sales per share: Pricesales ratio = Market price per share Revenues per share The pricesales ratio permits comparisons among companies without the issue of dealing with different accounting methods. This ratio also allows comparisons among companies that generate losses, in which the priceearnings ratio is not applicable. For example, if there is year for, say, airlines in which most or all airlines generate losses, the pricesales ratio gives us an idea of the valuation that investors apply to revenue generation. The pricesales ratio may not reflect valuation comparatively if companies have different cost structures, however. 5
7 A variation on this ratio is to include the market value of debt along with the market value of equity in the numerator. This allows more comparability among companies that have different capital structures. We can relate the pricesales ratio to fundamental factors using the familiar dividend valuation model: Starting with the dividend valuation model, 1 (1+g) P = = rg rg Recognizing that the dividend payout ratio is substituting E for, E E, where E is earnings per share, and P= E (1+ E rg g). ividing by sales per share, S, S E E S rg rg P E (1+g) Net profit margin (1+g) = =. We see through this decomposition of the value of a share that the pricesales ratio is related to the fundamentals of the net profit margin (through the inverse of earnings divided by sales), the plowback ratio, expected growth, and the required rate of return. Pricecash flow ratio The pricecash flow ratio, or pricetocash flow ratio, is the ratio of the market value of the equity to the company s cash flow for the period: Price  cashflow ratio Market value of equity Cashflows Price per share Cashflow per share There are several variants of the cash flow amount that is used. These variations include: Simplified cash flow, which is earnings plus depreciation, amortization and depletion; Cash flow from operations, from the statement of cash flows; and Free cash flow, which is often calculated as cash flow from operations, less capital expenditures, plus net borrowings. PEG ratio The PEG ratio is the ratio of the priceearnings ratio to the growth rate of earnings: PE ratio PEG ratio = Growth rate of earnings (expressed as a whole number) 6
8 The PEG ratio considers the company s expected growth directly by comparing the market s multiple applied to earnings with the growth rate anticipated by the analyst. Effectively, this ratio is a comparison of the market s assessment of the company s growth to that of the analyst. Though in most applications the PEG ratio is calculated using anticipated growth, in valuation situations of a nonpubliclytraded company it may not be possible to estimate the future growth rate, but rather it may be possible to look at the recent or historical growth rate of the companies. The general belief is that if a company s priceearnings ratio is approximately equal to the company s earnings growth rate hence a PEG ratio of the stock is appropriately priced; if the PEG ratio is lower than one, this implies that the stock is underpriced, whereas if the PEG ratio is greater than one, this implies that the stock is overpriced. Calculating the multiples For publiclytraded stocks the data used in the multiples is easy to obtain from the financial statements and financial websites. For 25, the comparable companies have the following data and multiples: Hershey Tootsie Roll Wm. Wrigley Average Market price per share 3/31/26* $52.23 $29.27 $64. Market price per share 12/31/25* $55.25 $28.93 $66.49 Number of shares outstanding 238,949,667 53,69, ,278,198 Earnings $567.3 million $65.6 million $544.3 million Book value of equity $1,21.1 million $617.4 million $2,214.4 million Sales $4,836. million $487.7 million $4,159.3 million Earnings growth rate 1% 6.5% 1% Priceearnings ratio Pricebook ratio Pricesales ratio PEG ratio * Source: Yahoo! Finance Source: 1K filings for fiscal year 25, filed with the Securities and Exchange Commission Source: Value Line Investment Survey, various issues. Based on the market value of stock on March 31, 26. Adjusting for differences in accounting The adjustments for differences in accounting are necessary if the subject company and the comparable companies use different methods of accounting such that these different methods may result in distortions in comparability. The methods of accounting that may cause such an issue include: The method of accounting for inventory, e.g., LIFO v. FIFO. If a company uses the LIFO method and comparables use FIFO, or vice versa, there is sufficient information in the footnotes to adjust the balance sheet and income statements to a FIFO basis. The method of accounting for depreciation, e.g., accelerated v. straightline. There is no simple method of adjusting the two methods because the extent of the difference depends on the age of the assets relative to their useful lives, information that is not readily available. The classification of leases, e.g., capital v. operating. If the subject company uses capital leases for all its leases and the comparables use operating leases, or vice versa, the simplest method of achieving comparability is to capitalize the operating leases based on footnote information and adjusting the balance sheet and the income statement appropriately. 7
9 Though there are some adjustments that are quite straightforward, there are other adjustments that are difficult to calculate and, effectively, must be guesstimated. The usefulness of any application of multiples requires understanding the data limitations and the resulting sensitivity of the estimated value. Applying the multiples The analysis and calculation of multiples using comparables provides valuable information in the valuation of the subject company. Value based on multiple of Using Hershey Tootsie Roll Wm. Wrigley Average Market valueearnings ratio $1, $2, $2, $2, Market valuebook ratio 2, , , Market valuesales ratio 1, , , ,6.46 PEG ratio 1, , , , As you can see, the valuation of the company of interest depends on the multiple that you apply, as well as your definition of the comparable. The wide range, from $53 million to $2,951 million, may be too wide to be practical. An analyst would delve deeper into the adjustments to the base (e.g., the comparability of earnings and the book value or equity), the appropriateness of using one multiple versus another in the particular case, and the most appropriate comparable. Issues multiples To average or not to average? The choice of a comparable or set of comparable companies was discussed previously. However, there is another issue that should be considered: How do you consider the multiples when you have more than one comparable. The issues involve: How do you treat companies that are different sizes? How do you deal with outlier multiples in the set of comparable? With regard to different size comparables, the issue is whether or not you use an equal weighted mean, a valueweighted mean, or a median. Consider the tire and rubber industry. In 26, the pricebook ratio calculated using these different metrics results in different values: Equal weighted arithmetic mean Value weighted arithmetic mean Median The equal weighted arithmetic mean is calculated by simply summing the values for the firms in the industry and dividing this sum by the number of firms. The value weighted arithmetic mean is calculated by summing the market values, summing the book values of equity, and then dividing the former sum by the latter sum. In this manner, the larger firms receive a greater weight in the average. The median is calculated as the center value of the ratio once the ratios are ranked in numerical order. The difference in these metrics can make a significant difference in the estimated value of the subject company. Which is best to use? It depends on the distribution of firms by size in the set of comparables, but also on the size of the subject company. For example, if the subject company is similar in size to the larger 8
10 firms in the industry, the analyst would want to use the valueweighted mean, rather than the median or the equalweighted mean. With regard to the outliers, the issue is whether or not you simply disregard the outliers as nonrepresentative, dropping them from consideration completely, or giving them less weight by using a harmonic mean or a geometric mean of the comparables multiples. 3 For example, using the same set of pricebook ratios, we observe two outliers that is, values significantly different than the other values in the sample. We could either calculate the harmonic mean, which results in a value of 2.39, or calculate the arithmetic mean removing the two outliers, resulting in a mean of The point of this is that the there are remedies, but they may result in different multiples for the comparables. Problems with the denominator One of the issues that an analyst faces in using multiples is that the denominator may be negative, resulting in a meaningless multiple. When looking at these multiples, we can see that there are cases in which the multiple cannot be calculated or, if mechanically can be calculated, is meaningless: 4 Multiple Priceearnings Pricebook Pricecash flow PEG Cannot be used when Earnings are zero or negative Equity is zero or negative Cash flow is zero or negative Earnings are zero or negative How often is the denominator in these common multiples negative? With sufficient frequency to cause problems in applying multiples in some industries and in some economic environment, as shown in Exhibit 2. Exhibit 2 The proportion of NYSE, AMSE and Nasdaq traded companies that experience negative earnings, cash flows, or book value of equity Earnings available for common shareholders before extraordinary items Cash flow from operations Book value of equity 5% Percentage of companies with zero or negative amounts 4% 3% 2% 1% % Source of data: Standard & Poor s Compustat 3 The harmonic mean gives each value in the sample a weight that is inverse to its value. 4 If the denominator is zero, the ratio cannot be calculated. If the denominator is negative, this will result in a meaningless ratio. 9
11 So, what is an analyst to do? One approach that analysts use is to invert a multiple. Consider the priceearnings ratio. The inverse of this ratio is the earnings yield. If a company s earnings are negative, the priceearnings ratio is meaningless, but the earnings yield is interpretable it is the return (positive or negative) per dollar of market value. Consider the priceearnings ratio (P/E) and earnings yield (E/P) for the companies traded on the NYSE, AMSE and the Nasdaq at the end of 26: Priceearnings Earnings yield Number of observations 3,991 5,534 Median % In other words, there were 1,543 of the 5,534 companies that had zero or negative earnings, and therefore the priceearnings ratio was meaningless. The Moldovsky effect Nicholas Molodovsky observed that priceearnings ratios exhibit a countercyclical behavior: during poor economic environment, priceearnings ratios tend to be inflated visavis those in good economic environments, and that these multiples tend to be meanreverting. 56 This mean reverting behavior has come to be referred to as the Moldovsky effect. What is happening is that the denominator is depressed during poor economic periods, yet the value in the numerator reflects investors expectations regarding future earnings. This is true even if a leading PE is used because the expectations built in to the numerator go well beyond the next fiscal period. We can see this in Exhibit 3, with the P/E ratio of the S&P 5 increasing substantially in the first quarter of 29, where earnings reflect the recessionary environment of 28, but the prices are forwardlooking to the possible economic recovery in Nicholas Molodovsky, A Theory of PriceEarnings Ratios, Financial Analysts Journal (January/February 1994) p Mean reversion is the tendency of a value to remain near or converge upon the average value over the longterm. 1
12 12/31/ /31/ /31/199 12/31/ /31/ /31/ /31/ /31/ /31/ /31/ /31/ /31/ /31/2 12/31/21 12/31/22 12/31/23 12/31/24 12/31/25 12/31/26 12/31/27 12/31/28 Exhibit 3 The PriceEarnings Ratio for the S&P 5 First Quarter 1988 through First Quarter P/E of the S&P Quarter end Source of data: Standard & Poor s Consider the furniture industry, which is a cyclical industry. I show the median earnings per share (EPS) and priceearnings ratio for this industry over the ten years, 1997 through 26, in Exhibit 4. Exhibit 4 Earnings per share and priceearnings ratios for the furniture industry, EPS PE EPS $1.4 $1.2 $1. $.8 $.6 $.4 $.2 $ P/E Source of data: Standard & Poor s Compustat First, you should notice that the two series tend to move in different directions. For example, the U.S. economy was in a recession from March 21 through November 21, during which the priceearnings ratios were higher than usual, and the EPS were lower than usual for this industry. 11
13 The Molodovsky effect is prevalent in any of the multiples that use earnings as a denominator, including those that use cash flows that are calculated based on earnings. What is the importance of this effect? Analysts using multiples to value a company should consider whether the multiple is affected by cycles in the economy and, if so, how the valuation should be adjusted to consider that the multiples tend toward a mean value over time, regardless of a particular economic cycle. Summary Analysts use multiples to value securities and there are many different multiples that can be used and different methods of applying these multiples. The basic idea is that to value a particular company, the analyst selects comparable companies, calculates the multiples that the market assigns to those companies, and then applies these multiples to the subject company. However, calculating and applying multiples is not straightforward, and the analyst must take care in the selection of the comparables, the selection of the multiple, and adjustments for any accounting differences. For further information 1. amodaran, Aswath, PE Ratios, a lecture on the use of PE to value a company. 2. Motley Fool, EarningsBased Valuations, 3. Stowe, John., Thomas R. Robinson, Jerald E. Pinto, and ennis W. McLeavey, Analysis of Equity Investments: Valuation, Association for Investment Management and Research, (United Book Press, Inc., 22), Chapter 4. Index ividend payout ratio, 4 Free cash flow, 6 Leading PE, 3 Mean reversion, 1 Moldovsky effect, 1 Net profit margin, 6 P/E. See Priceearnings ratio PE. See Priceearnings ratio PEG ratio, 6 Plowback ratio, 4 Pricebook ratio, 4 Pricecash flow ratio, 6 Priceearnings ratio, 3 Priceequity ratio, 4 Pricesales ratio, 5 Pricetobook ratio. See Pricebook ratio Pricetocash flow ratio. See Pricecash flow ratio Pricetosales ratio. See Pricesales ratio PSR. See Pricesales ratio Return on equity, 5 Trailing PE, 3 12
Chapter 17: Financial Statement Analysis
FIN 301 Class Notes Chapter 17: Financial Statement Analysis INTRODUCTION Financial ratio: is a relationship between different accounting items that tells something about the firm s activities. Purpose
More informationExcess Implied Return (EIR) 1. Dan Gode and James Ohlson
Excess Implied Return (EIR) 1 1. Overview EXCESS IMPLIED RETURN (EIR) Dan Gode and James Ohlson Investors often start their analysis using screens that provide preliminary indicators of mispriced stocks.
More informationWhat Do ShortTerm Liquidity Ratios Measure? What Is Working Capital? How Is the Current Ratio Calculated? How Is the Quick Ratio Calculated?
What Do ShortTerm Liquidity Ratios Measure? What Is Working Capital? HOCK international  2004 1 HOCK international  2004 2 How Is the Current Ratio Calculated? How Is the Quick Ratio Calculated? HOCK
More informationFinancial ratio analysis
Financial ratio analysis A reading prepared by Pamela Peterson Drake O U T L I N E 1. Introduction 2. Liquidity ratios 3. Profitability ratios and activity ratios 4. Financial leverage ratios 5. Shareholder
More informationCurrent Ratio: Current Assets / Current Liabilities. Measure of whether company has enough cash to cover immediate expenses
1 Beta: a measure of a stock s volatility relative to the overall market (typically the S&P500 index is used as a proxy for the overall market ). The higher the beta, the more volatile the stock price.
More informationTYPES OF FINANCIAL RATIOS
TYPES OF FINANCIAL RATIOS In the previous articles we discussed how to invest in the stock market and unit trusts. When investing in the stock market an investor should have a clear understanding about
More informationDividend valuation models Prepared by Pamela Peterson Drake, Ph.D., CFA
Dividend valuation models Prepared by Pamela Peterson Drake, Ph.D., CFA Contents 1. Overview... 1 2. The basic model... 1 3. Nonconstant growth in dividends... 5 A. Twostage dividend growth... 5 B. Threestage
More informationFinancial Statement Analysis!
Financial Statement Analysis! The raw data for investing Aswath Damodaran! 1! Questions we would like answered! Assets Liabilities What are the assets in place? How valuable are these assets? How risky
More informationAccrual Accounting and Valuation: Pricing Earnings
Security, Third Chapter Six LINKS Accrual Accounting and : Pricing Earnings Link to previous chapter Chapter 5 showed how to price book values in the balance sheet and calculate intrinsic pricetobook
More informationFundamental analysis
Fundamental analysis 2 June 2016 CERN Finance Club c.laner@cern.ch Introduction Let s cover the two main types of investment analysis used in traditional investing Today: Fundamental analysis Next time:
More informationHHIF Lecture Series: Financial Statement Analysis
HHIF Lecture Series: Financial Statement Analysis Alexander Remorov Based on the Materials by Daanish Afzal University of Toronto November 5, 2010 Alexander Remorov, Daanish Afzal (University of Toronto)
More informationEquity Valuation. Lecture Notes # 8. 3 Choice of the Appropriate Discount Rate 2. 4 Future Cash Flows: the Dividend Discount Model (DDM) 3
Equity Valuation Lecture Notes # 8 Contents About Valuation 2 2 PresentValues 2 3 Choice of the Appropriate Discount Rate 2 4 Future Cash Flows: the Dividend Discount Model (DDM) 3 5 The TwoStage DividendGrowth
More informationAn explanation of some basic concepts for Ratios and Analysis for Shares
An explanation of some basic concepts for Ratios and Analysis for Shares NPAT or Net Profits After Tax Net Profit after Tax (NPAT) is one of the more important figures that a company makes public. NPAT
More informationValuation Equity Analysis II: Relative Valuation Models. Valuation Models. Price Multiples. Price to Earnings. Rationales for using P/E
Valuation Equity Analysis II: Relative Valuation Models Valuation is the estimation of an asset s value based either on variables perceived to be related to future investment returns or on comparisons
More informationChapter 8. Stock Valuation Process. Stock Valuation
Stock Valuation Process Chapter 8 Stock Valuation: Investors use risk and return concept to determine the worth of a security. In the valuation process: The intrinsic value of any investment equals the
More informationRelative valuation and Technical Analysis
Relative valuation and Technical Analysis Relative vs. fundamental valuation The DCF model is a method of fundamental valuation. Value of equity is the present value of future cash flows. Ignores the current
More informationCHAPTER SIX. Accrual Accounting and Valuation: Pricing Earnings
CHAPTER SIX Accrual Accounting and Valuation: Pricing Earnings Concept Questions C6.1. Analysts typically forecast eps and eps growth without consideration for how earnings are affected by payout. That
More informationMCQ of Corporate Finance
MCQ of Corporate Finance 1. Which of the following is not one of the three fundamental methods of firm valuation? a) Discounted Cash flow b) Income or earnings  where the firm is valued on some multiple
More informationLECTURE 4. Valuing stocks Berk, De Marzo Chapter 9
1 LECTURE 4 Valuing stocks Berk, De Marzo Chapter 9 2 The Dividend Discount Model A OneYear Investor Potential Cash Flows Dividend Sale of Stock Timeline for OneYear Investor Since the cash flows are
More informationThe Edge Market  Features v 1 WW 1
The Edge Market  Features v 1 WW 1 Key Features of The Edge Market Dashboard The Dashboard offers data & analytics on all listed companies on the Bursa Malaysia and Singapore Exchange. These include the
More informationAccounting  Analysis and Uses of Financial Statements  Final Exam 105 Questions 1. are least interested in financial statement analysis.
Accounting  Analysis and Uses of Financial Statements  Final Exam 105 Questions 1. are least interested in financial statement analysis. A. Auditors Tax lawyers Investors Creditors 2. According SFAC
More informationModule 2: Preparing for Capital Venture Financing Financial Forecasting Methods TABLE OF CONTENTS
Module 2: Preparing for Capital Venture Financing Financial Forecasting Methods Module 2: Preparing for Capital Venture Financing Financial Forecasting Methods 1.0 FINANCIAL FORECASTING METHODS 1.01 Introduction
More informationFundamental Analysis Ratios
Fundamental Analysis Ratios Fundamental analysis ratios are used to both measure the performance of a company relative to other companies in the same market sector and to value a company. There are three
More informationSuggested Answers to Discussion Questions
Suggested Answers to Discussion Questions 1. (a) Fiscal policy would usually remain fairly strict during a strong economy with automatic stabilizers such as tax rates restraining inflation. (b) Interest
More informationSolutions to Problems
Solutions to Problems 1. From abbreviated financial statements (dollars in millions): Liquidity (1) Net working capital Current assets Current liabilities: $150 $100 $50 (2) Current ratio Current assets/current
More informationIs Apple overvalued? An Introduction to Financial Analysis
Is overvalued? An Introduction to Financial Analysis The fact that the stock price almost doubled during the last year, was evidence enough for many people to say that investors had gone crazy. Other people
More informationPortfolio Characteristic Definitions
ANALYTICAL SOLUTIONS GROUP PEP Portfolio Characteristic Definitions EQUITY PORTFOLIO CHARACTERISTICS All portfolio characteristics are derived by first calculating the characteristics for each security,
More informationClass #4 Using Accounting Earnings for Valuation aka EBO Valuation or Abnormal Earnings Valuation or Residual Income Valuation. 15.
Class #4 Using Accounting Earnings for Valuation aka EBO Valuation or Abnormal Earnings Valuation or Residual Income Valuation 15.535  Class #4 1 Where have we been & where are we going? Where have we
More informationTIP If you do not understand something,
Valuing common stocks Application of the DCF approach TIP If you do not understand something, ask me! The plan of the lecture Review what we have accomplished in the last lecture Some terms about stocks
More informationFSA Note: Summary of Financial Ratio Calculations
FSA Note: Summary of Financial Ratio Calculations This note contains a summary of the more common financial statement ratios. A few points should be noted: Calculations vary in practice; consistency and
More informationENTERPRISE VALUATION. Degree in Business Administration CORPORATE FINANCE. Szabolcs Sebestyén
ENTERPRISE VALUATION Szabolcs Sebestyén szabolcs.sebestyen@iscte.pt Degree in Business Administration CORPORATE FINANCE Sebestyén (ISCTEIUL) ENTERPRISE VALUATION Corporate Finance 1 / 36 Outline 1 Discounted
More informationChapter 9. The Valuation of Common Stock. 1.The Expected Return (Copied from Unit02, slide 36)
Readings Chapters 9 and 10 Chapter 9. The Valuation of Common Stock 1. The investor s expected return 2. Valuation as the Present Value (PV) of dividends and the growth of dividends 3. The investor s required
More informationChapter 5: Business Valuation (Market Approach)
Chapter 5: Business Valuation (Market Approach) This methodology values larger companies based upon the value of similar publicly traded For smaller companies, otherwise known as micro businesses (e.g.,
More informationChapter 9. The Valuation of Common Stock. 1.The Expected Return (Copied from Unit02, slide 39)
Readings Chapters 9 and 10 Chapter 9. The Valuation of Common Stock 1. The investor s expected return 2. Valuation as the Present Value (PV) of dividends and the growth of dividends 3. The investor s required
More informationU.S. EQUITIES: VALUATION & FUNDAMENTALS
LM Market Insight: U.S. EQUITIES: VALUATION & FUNDAMENTALS APR 2016 THIS MATERIAL IS ONLY FOR DISTRIBUTION IN THOSE COUNTRIES AND TO THOSE RECIPIENTS LISTED. PLEASE REFER TO THE DISCLOSURE INFORMATION
More informationTemplates available in Excel 97 (Excel 8) and higher versions:
Excel Templates Templates available in Excel 97 (Excel 8) and higher versions: All of the Excel templates in Research Insight can be customized to fit your own particular needs. Company Fundamental Analysis
More informationFinancial Statement Analysis and Security Valuation
Financial Statement Analysis and Security Valuation Fourth Edition Stephen H. Penman Columbia University McGrawHill Irwin Boston Burr Ridge, IL Dubuque, IA Madison, Wl New York San Francisco St. Louis
More informationAdjusted Cash Earnings (ACE) 1. Dan Gode and James Ohlson
Adjusted Cash Earnings (ACE) 1 1. Overview ADJUSTED CASH EARNINGS (ACE) Dan Gode and James Ohlson Accounting income is the sum of cash flows and accruals with the former being more objective than the latter.
More informationISS Governance Services Proxy Research. Company Financials Compustat Data Definitions
ISS Governance Services Proxy Research Company Financials Compustat Data Definitions June, 2008 TABLE OF CONTENTS Data Page Overview 3 Stock Snapshot 1. Closing Price 3 2. Common Shares Outstanding 3 3.
More informationResearch and Development Expenses: Implications for Profitability Measurement and Valuation. Aswath Damodaran. Stern School of Business
Research and Development Expenses: Implications for Profitability Measurement and Valuation Aswath Damodaran Stern School of Business 44 West Fourth Street New York, NY 10012 adamodar@stern.nyu.edu Abstract
More informationmultiples are easy to use and intuitive, they are also easy to misuse. Consequently, a
1 RELATIVE VALUATION CHAPTER 8 In discounted cash flow valuation, the objective is to find the value of assets, given their cash flow, growth and risk characteristics. In relative valuation, the objective
More informationWhat accounting students should know about the priceearnings ratio
ABSTRACT What accounting students should know about the priceearnings ratio Dean W. DiGregorio Southeastern Louisiana University The priceearnings ratio (P/E ratio) is a valuation multiple that can be
More informationFinancial Statement Analysis and Security Valuation
Financial Statement Analysis and Security Valuation Fifth Edition Stephen H. Penman Columbia University McGrawHill Irwin Contents List of Cases xxv List of Accounting Clinics xxvi Chapter 1 Introduction
More informationFinancial Statement Analysis
Financial Statement Analysis 1 The Interrelationships of the 4 Financial Statements Statement of Cash Flows For the year ended December 31, 20x2 (000) Net cash flows from operating activities $ 1,470 Net
More informationPrimary Market  Place where the sale of new stock first occurs. Initial Public Offering (IPO)  First offering of stock to the general public.
Stock Valuation Primary Market  Place where the sale of new stock first occurs. Initial Public Offering (IPO)  First offering of stock to the general public. Seasoned Issue  Sale of new shares by a
More informationREPORT ON THE FINANCIAL EVALUATION:
REPORT ON THE FINANCIAL EVALUATION: McDONALD'S CORPORATION AND YUM! BRANDS TAMARA AYRAPETOVA The aim of this paper is to perform financial analysis by using financial ratios and to comment, evaluate, and
More informationFinancial Statement and Cash Flow Analysis
Chapter 2 Financial Statement and Cash Flow Analysis Answers to Concept Review Questions 1. What role do the FASB and SEC play with regard to GAAP? The FASB is a nongovernmental, professional standards
More informationChapter 18 Financial Statement Analysis
Chapter 18 Financial Statement Analysis CHAPTER OVERVIEW Financial statements are the primary means an outsider uses to evaluate a particular company. Once completed, the results can be compared with other
More information62. The substantive growth rate refers to dividend growth that can be sustained by a company's earnings. A) True B) False
Investments 320 Dr. Ahmed Y. Dashti Interactive Qustions Chapter 6 61. Due to its simplicity, the constant perpetual growth model can be usefully applied to any company. A) True B) False 62. The substantive
More informationITRON, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited, in thousands, except per share data) Revenues $ 497,590 $ 446,746 Cost of revenues 334,387 308,324 Gross profit 163,203 138,422 Operating expenses
More informationMarch 31, 2014 Income from operations... $ 121,521 $ 136,082 $ 120,847
Akamai Technologies, Inc. Reconciliation of GAAP to NonGAAP Financial Measures In addition to providing financial measurements based on generally accepted accounting principles in the United States of
More informationSection 9 Firm valuation: Price multiples
Section 9 Firm valuation: Price multiples A little inaccurancy sometimes saves tons of explanation. H.H. Munro 1 Learning objectives After studying this chapter, you will understand How to use price
More informationPART I  MULTIPLE CHOICE
 Corporate Law Curriculum PART I  MULTIPLE CHOICE Instructions: For each of the following questions, circle the best answer. 1. Convertible bonds are best described as a. debentures that the holder
More informationValuing the Business
Valuing the Business 1. Introduction After deciding to buy or sell a business, the subject of "how much" becomes important. Determining the value of a business is one of the most difficult aspects of any
More informationIFRS Financial Ratios.
100 IFRS Financial Ratios Author s preface Dear readers, in order to make solid investments, investors compare companies within their peer group. For this purpose, key ratios such as EBIT, working capital
More informationStock valuation. Price of a First period's dividends Second period's dividends Third period's dividends = + + +... share of stock
Stock valuation A reading prepared by Pamela Peterson Drake O U T L I N E. Valuation of common stock. Returns on stock. Summary. Valuation of common stock "[A] stock is worth the present value of all the
More informationRAPID REVIEW Chapter Content
RAPID REVIEW BASIC ACCOUNTING EQUATION (Chapter 2) INVENTORY (Chapters 5 and 6) Basic Equation Assets Owner s Equity Expanded Owner s Owner s Assets Equation = Liabilities Capital Drawing Revenues Debit
More informationNIKE Case Study. Professor Corwin. An overview of the individual questions and their relation to the lecture topics is provided below.
NIKE Case Study Professor Corwin This case study includes several problems related to the valuation of Nike. We will work through these problems throughout the course to demonstrate some of the most important
More informationForecasting and Valuation of Enterprise Cash Flows 1. Dan Gode and James Ohlson
Forecasting and Valuation of Enterprise Cash Flows 1 1. Overview FORECASTING AND VALUATION OF ENTERPRISE CASH FLOWS Dan Gode and James Ohlson A decision to invest in a stock proceeds in two major steps
More informationReturn on Equity has three ratio components. The three ratios that make up Return on Equity are:
Evaluating Financial Performance Chapter 1 Return on Equity Why Use Ratios? It has been said that you must measure what you expect to manage and accomplish. Without measurement, you have no reference to
More information2. The spreadsheet implementation of the three transformations
Valuation: Dividends, Book Values, and Earnings 1 1. Overview VALUATION: DIVIDENDS, BOOK VALUES, AND EARNINGS Dan Gode and James Ohlson Dividends, book values, and earnings are the three widely used financial
More informationFinancial Formulas. 5/2000 Chapter 3 Financial Formulas i
Financial Formulas 3 Financial Formulas i In this chapter 1 Formulas Used in Financial Calculations 1 Statements of Changes in Financial Position (Total $) 1 Cash Flow ($ millions) 1 Statements of Changes
More informationProblems for CFA Level I
Problems for CFA Level I Analysis of Inventories 1. Assume that purchases and unit costs throughout the year were as in Table 1. Inventory at beginning of Quarter I: 400 units at $20 per unit = $8,000.
More informationFinancial ratios can be classified according to the information they provide. The following types of ratios frequently are used:
Financial Ratios Financial ratios are useful indicators of a firm's performance and financial situation. Most ratios can be calculated from information provided by the financial statements. Financial ratios
More informationMacIC Beginner Question Bank
Accounting MacIC Beginner Question Bank Here are the 5 most important Accounting concepts you need to know: The 3 financial statements and what each one means How the 3 statements link together and how
More informationSolutions to Chapter 3. Accounting and Finance
Solutions to Chapter 3 Accounting and Finance 1. Sophie s Sofas Liabilities & Assets Shareholders Equity Cash $ 10,000 Accounts payable $ 17,000 Accounts receivable 22,000 Longterm debt 170,000 Inventory
More informationCHAPTER FOUR Cash Accounting, Accrual Accounting, and Discounted Cash Flow Valuation
CHAPTER FOUR Cash Accounting, Accrual Accounting, and Discounted Cash Flow Valuation Concept Questions C4.1. There are difficulties in comparing multiples of earnings and book values  the old techniques
More informationBond Valuation. What is a bond?
Lecture: III 1 What is a bond? Bond Valuation When a corporation wishes to borrow money from the public on a longterm basis, it usually does so by issuing or selling debt securities called bonds. A bond
More informationDiscounted Cash Flow: Application and Misapplication. Hal Heaton, PhD
Discounted Cash Flow: Application and Misapplication Hal Heaton, PhD The Income Approach to Valuation In the income approach (specifically the discounted cash flow approach) value is determined by discounting
More informationCardinal Health, Inc. Earnings Investor/Analyst call August 2, 2016
Q4 FY2016 Cardinal Health, Inc. Earnings Investor/Analyst call August 2, 2016 Copyright 2016, Cardinal Health, Inc. or one of its subsidiaries. All rights reserved Forwardlooking statements and GAAP reconciliation
More informationSecond Quarter 2013 NonGAAP
Resources, Inc. Second Quarter 2013 NonGAAP Reconciliation and Appendix Operating Results June 30, % June 30, % (in thousands) 2013 2012 change 2013 2012 change Revenues (excludes derivatives) Oil $ 4,524
More informationFinancial Highlights Data Overview
Financial Highlights Data Overview Published: January 2013 Updated March 27, 2013 Institutional Shareholder Services Inc. Copyright 2013 by ISS www.issgovernance.com Table of Contents FINANCIAL HIGHLIGHTS
More informationMarket Capitalization $1.8 Billion
BUY HOLD SELL A+ A A B+ B B C+ C C D+ D D E+ E E F HOLD December 13, 2015 SDAQ: HOLD RATING SINCE 01/27/2014 BUSINESS DESCRIPTION RealPage, Inc. provides demand software and softwareenabled services
More informationJOHN WILEY & SONS, INC. UNAUDITED SUMMARY OF OPERATIONS FOR THE FIRST QUARTER ENDED JULY 31, 2011 AND 2010 (in thousands, except per share amounts)
UNAUDITED SUMMARY OF OPERATIONS FOR THE FIRST QUARTER ENDED JULY 31, 2011 AND 2010 (in thousands, except per share amounts) US GAAP First Quarter Ended Revenue $ 430,069 407,938 5% Costs and Expenses Cost
More informationUnderstanding Financial Management: A Practical Guide Guideline Answers to the Concept Check Questions
Understanding Financial Management: A Practical Guide Guideline Answers to the Concept Check Questions Chapter 3 Interpreting Financial Ratios Concept Check 3.1 1. What are the different motivations that
More information4th QUARTER FY 2016 EARNINGS PRESENTATION
4th QUARTER FY 2016 EARNINGS PRESENTATION 1 ForwardLooking Statements All written or oral statements made by CSC at this meeting or in these presentation materials that do not directly and exclusively
More informationSample Exam Questions and Answers
1 Sample Exam Questions and Answers 1. Which of the following statements is most correct? a. Proprietorship is generally not easily and inexpensively formed. b. Partnership has limited liability and limited
More informationClass #5 Comparative Analysis Class #5 1
15.535 Class #5 Comparative Analysis 15.535  Class #5 1 Announcements Assignment #1: Hand in at start of class on Tuesday, Feb, 25 th. 2 page memo (any format) Complete individually or in group of up
More informationPart I: Understanding and Interpreting Financial Statements. The Asset Side of the Balance Sheet. The Liability Side of the Balance Sheet
Financial Statement Analysis & Business Valuation for the Practical Lawyer TABLE OF CONTENTS Sidebars Preface Acknowledgments Introduction Part I: Understanding and Interpreting Financial Statements Chapter
More informationTotal financial statements. Consolidated accounts in US Dollars, IFRS 2011, 2012 and 2013 annual and 2013 quarters
Total financial statements Consolidated accounts in US Dollars, IFRS 2011, 2012 and annual and quarters CONSOLIDATED STATEMENT OF INCOME For the year ended December 31, 2012 2011 Sales 251,725 257,037
More informationOften stock is split to lower the price per share so it is more accessible to investors. The stock split is not taxable.
Reading: Chapter 8 Chapter 8. Stock: Introduction 1. Rights of stockholders 2. Cash dividends 3. Stock dividends 4. The stock split 5. Stock repurchases and liquidations 6. Preferred stock 7. Analysis
More informationBalance Sheet. Assets. Current Assets Total ( )...4
Balance Sheet Assets + Cash and ShortTerm Investments... 1 + Cash...162 + ShortTerm Investments...193 + Receivables Total... 2 + Receivables Trade...151 + Income Tax Refund...161 + Receivables Current
More informationSection 3 Financial and stock market ratios
Section 3 Financial and stock market ratios Introduction 41 Ratio calculation 42 Financial status ratios 43 Stock market ratios 45 Debt: shortterm or longterm? 47 Summary 48 Problems 49 INTRODUCTION
More informationInDepth Guide{ Reading a Value Line Research Report
InDepth Guide{ Reading a Value Line Research Report 2013, Value Line, Inc. All Rights Reserved. Value Line, the Value Line logo, the Value Line Investment Survey, Timeliness and Safety are trademarks
More informationKey Concepts and Skills Chapter 8 Stock Valuation
Key Concepts and Skills Chapter 8 Stock Valuation Konan Chan Financial Management, Spring 2016 Understand how stock prices depend on future dividends and dividend growth Be able to compute stock prices
More informationCourse 1: Evaluating Financial Performance
Excellence in Financial Management Course 1: Evaluating Financial Performance Prepared by: Matt H. Evans, CPA, CMA, CFM This course provides a basic understanding of how to use ratio analysis for evaluating
More informationAgrium Inc.  Company Profile, SWOT & Financial Report
 Company Profile, SWOT & Financial Report ICD Research. This product is licensed and not to be photocopied _ TABLE OF CONTENTS 1 Agrium Inc.  Key Employees... 7 2 Agrium Inc.  Key Employee Biographies...
More informationDealing with Operating Leases in Valuation. Aswath Damodaran. Stern School of Business. 44 West Fourth Street. New York, NY 10012
Dealing with Operating Leases in Valuation Aswath Damodaran Stern School of Business 44 West Fourth Street New York, NY 10012 adamodar@stern.nyu.edu Abstract Most firm valuation models start with the aftertax
More informationCorporate Finance I. Financial Ratios. Maximilian Wimmer University of Mannheim
Corporate Finance I Financial Ratios Maximilian Wimmer University of Mannheim http://cf.bwl.unimannheim.de wimmer@corporatefinancemannheim.de Valuation with multiples Many practitioners use multiples
More informationFinancial Accounting. Financial Statement Analysis
Financial Accounting Financial Statement Analysis Dr. Charles W. Mulford Scheller College of Business Georgia Institute of Technology Atlanta, GA 303320520 (404) 8944395 cwmulford@gmail.com Financial
More informationMarket Capitalization $30.5 Billion
BUY HOLD SELL A+ A A B+ B B C+ C C D+ D D E+ E E F Annual Dividend Rate BUY BUY RATING SINCE 09/12/2013 TARGET PRICE $14.28 WIT BUSINESS DESCRIPTION Wipro Limited operates as an information technology
More informationFive steps to valuing a business
1. Collect the relevant information Five steps to valuing a business The starting point for Valuecruncher valuing a business is the latest financial statements. The business accountant should be able to
More informationCHAPTER 8 STOCK VALUATION
CHAPTER 8 STOCK VALUATION Answers to Concepts Review and Critical Thinking Questions 5. The common stock probably has a higher price because the dividend can grow, whereas it is fixed on the preferred.
More informationRicoh Company, Ltd. INTERIM REPORT (Non consolidated. Half year ended September 30, 2000)
Ricoh Company, Ltd. INTERIM REPORT (Non consolidated. Half year ended September 30, 2000) *Date of approval for the financial results for the half year ended September 30, 2000, at the Board of Directors'
More informationII. Estimating Cash Flows
II. Estimating Cash Flows DCF Valuation Aswath Damodaran 61 Steps in Cash Flow Estimation Estimate the current earnings of the firm If looking at cash flows to equity, look at earnings after interest expenses
More information6505275152 6505276273 SYMANTEC REPORTS FIRST QUARTER FISCAL YEAR 2016 RESULTS
FOR IMMEDIATE RELEASE MEDIA CONTACT: INVESTOR CONTACT: Kristen Batch Sean Hazlett Symantec Corp. Symantec Corp. 6505275152 6505276273 kristen_batch@symantec.com sean_hazlett@symantec.com SYMANTEC REPORTS
More informationDo Earnings Lie? A Case Demonstrating LegallyPermissible Manipulation of Corporate Net Income
Do Earnings Lie? A Case Demonstrating LegallyPermissible Manipulation of Corporate Net Income James Bannister University of Hartford Susan Machuga University of Hartford This case demonstrates the flexibility
More informationResearch Insight SM. North America Data Items POPULATION & COVERAGE GENERAL COMPANY INFORMATION
Research Insight SM North America Data Items POPULATION & COVERAGE Standard & Poor's COMPUSTAT North America provides you with up to 20 years of annual and monthly data and up to 48 quarters of quarterly
More informationRatios Formula Purpose/Use
Ratio Review: Formulas, Purpose & Use Word of Caution: Please remember that the significance of any particular ratio in the ratio analysis set is highly dependent upon the industry. For example, Gross
More informationThe cost of capital. A reading prepared by Pamela Peterson Drake. 1. Introduction
The cost of capital A reading prepared by Pamela Peterson Drake O U T L I N E 1. Introduction... 1 2. Determining the proportions of each source of capital that will be raised... 3 3. Estimating the marginal
More information