PE ratio is a metric that compares a company's stock price to its earnings per share. It indicates how much an investor pays for each dollar of earnings. A PE ratio is calculated by dividing the current stock price by the earnings per share. PE ratios help investors compare similar companies and determine if a stock is undervalued, appropriately priced, or overvalued. Factors like growth rates, profit margins, returns, macroeconomic conditions, and intangible assets can impact a company's PE ratio. Comparing a company's PE ratio to its industry peers provides useful insight into how the market values that company.
The document discusses factors that influence company earnings and forecasts. It covers topics like earnings before interest and taxes (EBIT), return on assets, earnings per share, leverage, tax rates, fixed and variable costs, and break-even point analysis. Management efficiency, sales, capacity utilization, debt financing, asset value, and tax planning can all impact EBIT. Forecasting individual revenue and expense items provides the most scientific way to estimate earnings, which are used along with the price-earnings ratio to deduce expected market price. Companies with large capital investments have high break-even points and longer periods to generate profits and dividends.
The document discusses how to analyze a business using financial ratios. It explains that ratios show the relationship between two numbers and can be used to compare a company's performance over time and to other companies in the same industry. The document then outlines 12 steps for conducting a basic financial analysis of a company, including acquiring financial statements, calculating common size ratios and other key financial ratios related to liquidity, debt, profitability, efficiency and stock value. These ratios can provide insights into a company's strengths and weaknesses.
The document discusses various ways to estimate growth rates for earnings, revenues, and operating income. It explores using historical growth rates, analyst estimates, and fundamentals-based approaches. The fundamentals-based approaches estimate growth based on reinvestment rates and returns on capital/equity. They note growth rates depend upon changing returns over time and how negative earnings, changing margins, and size effects are incorporated into the estimates.
COMPANY ANALYSIS-HINDUSTAN UNILEVER LTDSaiLakshmi115
Introduction to company analysis# About the company in short # vision # mission # Standard of conduct # culture and value # business model of HUL # swot analysis of HUL # management and its structure # corporate culture and governance # Quantitative analysis of the company- HUL: Earnings, Leverages, competitive edge, production efficiency, financial analysis, cash flow, Ratio analysis # conclusion
Relative valuation involves comparing the value of an asset to similar assets in the market. To do relative valuation, one must identify comparable assets and obtain their market values in order to calculate standardized price multiples that control for differences between firms. Relative valuation reflects market perceptions and is useful when the objective is to value a security based on current market price, such as for an IPO, or when using momentum-based strategies. However, relative valuation also means that some securities will always appear under or overvalued. It generally requires less information than discounted cash flow valuation.
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This document outlines various types of business analysis and provides a roadmap for conducting financial analysis. It discusses analyzing a company's business environment, strategy, profile, and financial performance. It then describes various ratios used in ratio analysis to evaluate a company's short-term and long-term solvency, profitability, efficiency, liquidity, and valuation. Comparative standards and influencing factors are also noted for each type of ratio analysis.
Chapter 05(a) financial analysis-ratio and other analysisAl Sabbir
The document discusses various methods for analyzing the financial performance of a company through its financial statements, including ratio analysis, common size analysis, trend analysis, DuPont analysis, and other types of analyses. It provides examples of different types of ratios that can be used, such as liquidity ratios, activity ratios, leverage ratios, and profitability ratios. It also discusses how to interpret ratios and cautions that ratios must be compared to benchmarks and should account for differences in accounting methods.
Equity-Investment Analyst who have been working in the financial markets for over 35 years. A University of Pennsylvania Wharton School of Business Graduate, an Investment and Financial leader on Capital Hill in Washington, DC and 20 years of financial modeling and analysis consulting experience. I am a teacher, a mentor and accomplished businessman eager to share my experience, and helpful advice
Explain the various categories of ratio analysis and provide example.pdfarchanenterprises
Explain the various categories of ratio analysis and provide examples of at least two ratios in
each category. If you were an investor, which category would you be most interested in? Why?
Solution
Part-1
Ratios are used by lenders and business analysts to determine a company\'s financial stability and
standing.It\'s important to understand that financial ratios are time sensitive; they can only show
a picture of a business at a given time. There are five catagories of Financial ratios and those are
as follows :
Part-2 :
There are a large variety of ratios out there, but for an investor using financial ratios which are
broken up into four major categories: profitability ratios, liquidity ratios, solvency ratios and
valuation ratios. As an investor he should consider Profitability ratio because Profitability ratio is
a key piece of information that should be analyzed when you\'re considering investing in a
company. This is because high revenues alone don\'t necessarily translate into dividends for
investors unless a company is able to clear all of its expenses and costs. In general, the higher a
company\'s profit margin, the better, but as with most ratios, it is not enough to look at it in
isolation. It is important to compare it to the company\'s past levels, to the market average and to
its competitors.
Profitability Ratios : The profitability ratios are just what the name implies. They focus on the
firm\'s ability to generate a profit and an adequate return on assets and equity. They measure how
efficiently the firm uses its assets and how effectively it manages its operations and answers
questions like how efficiency his business and it helps to compare with other competitor.
Examples of Proftitablity ratios are Gross profit ratio, Net profit ratio, Operating profit ratio and
Return on investment ratio.
Market Value Ratios : The market value ratios can be calculated for publicly traded companies
only as they relate to stock price. There are many market value ratios, but a few of the most
commonly used are price/earnings (P/E), book value to share value and dividend yield .
LEVERAGE RATIO /Capital Structure ration : The term capital structure refers to the
relationship between various long term forms of financing such as debentures (long term),
preference share capital and equity share capital including reserves and surpluses. Leverage or
capital structure ratios are calculated to test the long term financial position of a firm. Generally
capital gearing ratio is mainly calculated to analyse the leverage or capital structure of the firm.
Example of ratios are total debt ratios, the debt/equity ratio, the long-term debt ratio, the times
interest earned ratio, the fixed charge coverage ratio, and the cash coverage ratio.
Asset Efficiency or Turnover Ratios : The asset efficiency or turnover ratios measure the
efficiency with which the firm uses its assets to produce sales. As a result, it focuses on both the
income statement (sales) and the .
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The document discusses various types of financial ratios used to analyze a company's performance and financial health. It covers liquidity ratios, activity ratios, solvency ratios, profitability ratios, and ownership ratios. Specific ratios mentioned include the current ratio, quick ratio, cash ratio, accounts receivable turnover, inventory turnover, total assets turnover, debt ratio, times interest earned, gross profit margin, return on assets, earnings per share, and price to earnings ratio. The ratios are used to evaluate a company's liquidity, asset use efficiency, debt levels, profitability, and stock valuation.
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2. PE RATIO
PE ratio is a metric that compares a company’s current stock price to its earnings
per share, or EPS, which can be calculated based on historical data (for trailing PE)
or forward-looking estimates (for forward PE). It's a standard part of stock
research investors use to:
● Compare the stock prices of similar companies to find outliers.
● Determine if the stock is undervalued, appropriately priced or overvalued.
● Decide, based on its value, if they should buy, sell or hold any particular
stock.
● “PE ratio” may sound technical, but it’s really just a comparison of how the
public feels about a company (its stock price) and how well the company is
actually doing (its EPS).
3. Example
A company posts stable profits quarter after quarter, and its
projected profits are equally stable.
If its stock price jumps but its earnings stay
What happens to the intrinsic value of the company ?
Does it change ?
Why did the price increase then?
If a company’s PE ratio is significantly higher than its peers
what does it mean?
4. It’s a measure of how much investors are paying for every Rs.1 of a
company’s earnings. Imagine two similar companies in the same
sector. One has a share price of Rs.100 and a PE ratio of 15. The
other has a share price of Rs 50 and a PE ratio of 30. The first
company’s share price may be higher, but a PE ratio of 15 means
you’re only paying Rs. 15 for every Re.1 of the company’s earnings.
Investors in the company with a PE ratio of 30 are paying Rs. 30 for
Re 1 of earnings.
5. How to Calculate P/E Ratios
There are two main types of P/E ratio analysis:
Trailing
A trailing P/E analysis divides the cost per share by the company’s past 12
months of earnings (often referred to as the trailing twelve months or TTM).
This method is the most commonly used approach because the data is
objective — as long as the company has reported its earnings correctly and
honestly, a trailing P/E ratio uses only concrete data, rather than subjective
or projected data.
However, because past earnings are only reported every quarter, and stock
prices can change daily as the market evolves, the trailing P/E ratio will
constantly change.
6. Forward
A forward P/E analysis uses forecasted earnings — how much a
company expects to earn in the future. Forward P/E ratios are useful
because a company’s past data is not always indicative of future
performance.
However, a forward P/E relies heavily on estimations from analysts
and the company itself. A company may over or underestimate its
future earnings as a way to toy with its P/E ratios and drive changes
in investor behavior.
7. PE ratio formula
The main formula used to calculate a company’s trailing P/E ratio is:
P/E Ratio = Cost per Share / Earnings per Share
In this formula:
•Cost per share is the current trading price of a stock or how much it costs to
buy one share in the company.
•Earnings per share (EPS) is how much net profit the company sees each year,
divided by the total number of outstanding shares (shares of common stock
issued to investors). In a trailing P/E analysis, the earnings per share is based
on the previous 12 months of earnings, while a future P/E analysis looks at
projected earnings from analysts and the company itself.
8. A company’s P/E ratio will be shown in a “#x” type of format (such as
20x or 15x) — this signifies how many times higher the stock price is
compared to the earnings per share.
Raymond March 2023
EPS= Rs 79.45 Current price is =Rs 1907
PE ratio= 24
One way to put it is that the stock is trading 24 times higher than the
company’s earnings, or 24x.
9. To truly understand the value of a company’s P/E ratio, it needs to be compared to
another company. Let’s look at the following table:
Company A Company B Industry Average
Cost per Share Rs30 Rs20
Earnings per Share Re1 Re0.50
P/E Ratio 30x 40x 30x
Because Company B is cheaper per share, it is tempting to assume it is a better deal
than Company A. However, Company A is cheaper because you are paying less for
every $1 of earnings per year. Especially if we take into consideration that the
industry average for these companies is 30x, Company A is the more “on par”
investment — it is well-priced compared to most companies in the industry.
Company B is overvalued. This could indicate that investors are expecting high future
growth for that company, but the investment is riskier overall.
11. FACTORS AFFECTING P/E RATIO
Growth in earnings and sales
This is one of the primary factors driving P/E ratios of stocks. Markets always prefer companies
that are able to grow their top-line and their bottom line at a rapid pace. This could be newer
markets or due to greater penetration of existing markets. The idea is that investors are willing to
pay a higher price for growing stocks than for non-growing stocks. That explains why stocks like
Motherson Sumi continue to get rich P/Es because they have proven consistent growth over a
period of time. When it comes to growth, what matters are not just the projections but what has
been delivered consistently?
Operating profits margins and net margins
Companies that are able to expand their operating margins (OPM) and their net margins (NPM)
consistently over time get better valuations in the market. That is because such companies are
showing momentum in converting growth into profits. OPM is given greater importance than
NPM.
12. Return on equity and return on capital employed
The P/E ratio of the stock will be ultimately be determined by the Return on Equity and
the Return on capital employed. Equity will be willing to pay a higher price only if you
earn substantially better returns on the capital. Normally, companies with a large debt
component or a large equity base will tend to have lower ROEs and also command
lower P/E ratios.
Macro conditions prevailing in the market
The impact varies from sector to sector . These are mainly anticipatory in nature. For
example,
● When rural incomes are likely to increase you will find the P/E ratio of two
wheelers, tractors and FMCG expanding.
● When the capital cycle is looking to turn around you will find the P/E ratio of
heavy equipment and capital goods companies turning around.
● When interest rates are trending lower, then rate sensitives like banks, realty
and NBFCs get better P/E valuations.
13. Stage of the cycle in case of commodities
This is very specific to commodities like steel, aluminium, copper, oil etc. Normally, you
will find that these commodity companies tend to command lower P/E ratios
compared to sectors like automobiles, IT, FMCG or pharma.
That is because, there is not much to differentiate and price is the only factors. But
you will find that the P/E ratios of these commodity companies tend to move up when
there is clear evidence of the global commodity cycle moving up.
Brands, distribution networks and other intangibles
P/E ratios are not just about tangibles on the income statement and balance sheet but
also about intangibles(qualitative factors,moat). Many companies are able to
differentiate and create an edge. For example,
Hindustan Unilever has created an edge through its brands while
ITC has created an edge through its unmatched distribution network. These
intangibles are a key factor in assigning a higher P/E ratio for select stocks.
14. Lower debt and lower equity base
Markets prefer companies that do not have too much debt on their balance
sheet. Higher debt means greater financial risk and lower coverage ratios. In
fact, if you look at the companies with higher than average P/E Ratio, they
are companies that are not leveraged too much and have a low equity base.
Eicher Motors , MRF
15. Dividend Theory
Dividend decision of the firm is yet another crucial area of financial management. The
important aspect of dividend policy is to determine the amount of earnings to be distributed
to shareholders and the amount to be retained in the firm.
ISSUES IN DIVIDEND POLICY
the objective of a dividend policy should be to maximize a shareholder’s return so that the
value of his investment is maximized. Shareholders’ return consists of two components:
dividends and capital gains.
16. DIVIDEND RELEVANCE: WALTER’S MODEL
Assumptions
● Internal financing The firm finances all investment through retained earnings; that is,
debt or new equity is not issued.
● Constant return and cost of capital The firm’s rate of return, r, and its cost of capital,
k, are constant.
● 100 per cent payout or retention All earnings are either distributed as dividends or
reinvested internally immediately.
● Constant EPS and DIV Beginning earnings and dividends never change. The values of
the earnings per share, EPS, and the dividend per share, DIV, may be changed in the
model to determine results, but any given values of EPS or DIV are assumed to remain
constant forever in determining a given value.
● Infinite time The firm has a very long or infinite life.
Editor's Notes
the same (and no earnings increases are expected), the company’s intrinsic value didn’t change; the market’s perception of the company did.
From the above chart it can be gauged that the P/E Ratio of the Sensex has been shifting from as low as 15X earnings to as high as 25X earnings. Of course, these are yearly averages and markets have seen much greater volatility during the year. For example in March 2003 and in March 2009, the index was available at 11-12 times P/E. Similarly, in Jan 2000 and in Jan 2008, the Sensex was valued at close to 28 times P/E. But, we get back to our core question of the factors that actually influence the P/E ratio of a stock