P\e ratio
This query is : Resolved
06 March 2012
Can anyone tell me how to determine P\E of a company....
if a company is going for public issue in that case the share of the company will not be trading at the market so how we will determine the P\E multiple...
how the companies are manipulating to arrive higher P\E ration in order to arrive the higher market price....
I will be very thankful to those who will add some practical aspect in this...
if a company is going for public issue in that case the share of the company will not be trading at the market so how we will determine the P\E multiple...
how the companies are manipulating to arrive higher P\E ration in order to arrive the higher market price....
I will be very thankful to those who will add some practical aspect in this...
06 March 2012
Dear Pradeep,
PE ratio is an indicator for an investor to determine the theoretical price of the shares on listed stock exchange. PE Ratio can be decided only at the point when shares are trading in secondary market. For any new issue when shares are first time listed price is either determined by process of book building or Price Band Method.
Further and Very Important, shares price are varies due to various factors like performance of the company, declaration of dividend, quarterly results, govt. policy for the particular sector, tax reliefs, market conditions, market news etc. Share prices are completely depends on EPS. After shares are started to trading in seconday market, it gets a market value on the basis of which PE ratio is decided and same is applied by the investors on EPS whenever they want to buy the shares in order to know the efficieny of the market for particular shares but this is not a only factor to determine the share pricing.
Regards,
Nishad
PE ratio is an indicator for an investor to determine the theoretical price of the shares on listed stock exchange. PE Ratio can be decided only at the point when shares are trading in secondary market. For any new issue when shares are first time listed price is either determined by process of book building or Price Band Method.
Further and Very Important, shares price are varies due to various factors like performance of the company, declaration of dividend, quarterly results, govt. policy for the particular sector, tax reliefs, market conditions, market news etc. Share prices are completely depends on EPS. After shares are started to trading in seconday market, it gets a market value on the basis of which PE ratio is decided and same is applied by the investors on EPS whenever they want to buy the shares in order to know the efficieny of the market for particular shares but this is not a only factor to determine the share pricing.
Regards,
Nishad
Message likes :
2 times
06 March 2012
MR Nishad thanks for showing your interest..
i a totally agree with you....
i have also done some R&D in this and come to know that:
1- it is the price that a company want from investor for every Rs. of its earning..
2- Public utility companies normally have lowest P\E Ratio
3- Technology Company have highest P\E Ratio amongest the companies
but i am still not satisfy about the basis and weight of the various factors listed by you to arrive that number....
can u help me more with a practical regarding this....
thanku....
i a totally agree with you....
i have also done some R&D in this and come to know that:
1- it is the price that a company want from investor for every Rs. of its earning..
2- Public utility companies normally have lowest P\E Ratio
3- Technology Company have highest P\E Ratio amongest the companies
but i am still not satisfy about the basis and weight of the various factors listed by you to arrive that number....
can u help me more with a practical regarding this....
thanku....
07 March 2012
Valuation using multiples
From Wikipedia, the free encyclopedia
Valuation using multiples is a method for determining the current value of a company by examining and comparing thefinancial ratios of relevant peer groups, also often described as comparable company analysis (or comps). The most widely used multiple is the price-earnings ratio (P/E ratio or PER) of stocks in a similar industry. Using the average of multiple PERs improves reliability but it can still be necessary to correct the PER for current market conditions.
P/E multiples are popular in part due to their wide availability. The value of a business should, however, be reflected in multiples based on enterprise value (EV/EBITDA, EV/EBIT, EV/NOPAT) of a company. These multiples reveal the rating of a business independently of its capital structure, and are the most commonly used in transactions on private companies.
Mathematics
Condition: Peer company is profitable.
Rf = discount rate during the last forecast year tf = last year of the forecast period. C = correction factor P = current stock Price NPP = net profit peer company S = number of shares NPO = net profit of target company after forecast period
Determine Forecast Period
Determine the year after which the company value is to be known.
Example:‘VirusControl’ is an ICT startup that has just finished their business plan. Their goal is to provide professionals with software for simulating virus outbreaks. Their only investor is required to wait for 5 years before making an exit. Therefore VirusControl is using a forecast period of 5 years.
[edit]Identifying peer companies
Search the (stock)market for companies most comparable to the target company. From the investor perspective, a peer universe can also contain companies that are not only direct product competitors but are subject to similar cycles, suppliers and other external factors (e.g. a door and a window manufacturer may be considered peers as well).
Important characteristics include: operating margin, company size, products, customer segmentation, growth rate, cash flow, number of employees, etc.
Example:
VirusControl has identified 4 other companies similar to itself.
Medical Sim
Global Plan
Virus Solutions
PM Software
Determining correct Price Earning Ratio (P/E)
The price earnings ratio (P/E) of each identified peer company can be calculated as long as they are profitable. The P/E is calculated as:
P/E = Current Stock Price / (Net Profit / Number of shares)
Particular attention is paid to companies with P/E ratios substantially higher or lower than the peer group. A P/E far below the average can mean (among other reasons) that the true value of a company has not been identified by the market, that thebusiness model is flawed, or that the most recent profits include, for example, substantial one-off items. Companies with P/E ratios substantially different from the peers (the outliers) can be removed or other corrective measures used to avoid this problem.
Example:
P/E ratio of companies similar to VirusControl:
Determining future company value
The value of the target company after the forecast period can be calculated by:
Average corrected PER * net profit at the end of the forecast period.
Example:
VirusControl is expecting a net profit at the end of the fifth year of about € 2.2 million. They use the following calculation to determine their future value:
((17.95 + 21.7 + 20.8) / 3) * 2.200.000 = € 44.3 million
Determining discount rate / factor
Determine the appropriate discount rate and factor for the last year of the forecast period based on the risk level associated with the target company
From Wikipedia, the free encyclopedia
Valuation using multiples is a method for determining the current value of a company by examining and comparing thefinancial ratios of relevant peer groups, also often described as comparable company analysis (or comps). The most widely used multiple is the price-earnings ratio (P/E ratio or PER) of stocks in a similar industry. Using the average of multiple PERs improves reliability but it can still be necessary to correct the PER for current market conditions.
P/E multiples are popular in part due to their wide availability. The value of a business should, however, be reflected in multiples based on enterprise value (EV/EBITDA, EV/EBIT, EV/NOPAT) of a company. These multiples reveal the rating of a business independently of its capital structure, and are the most commonly used in transactions on private companies.
Mathematics
Condition: Peer company is profitable.
Rf = discount rate during the last forecast year tf = last year of the forecast period. C = correction factor P = current stock Price NPP = net profit peer company S = number of shares NPO = net profit of target company after forecast period
Determine Forecast Period
Determine the year after which the company value is to be known.
Example:‘VirusControl’ is an ICT startup that has just finished their business plan. Their goal is to provide professionals with software for simulating virus outbreaks. Their only investor is required to wait for 5 years before making an exit. Therefore VirusControl is using a forecast period of 5 years.
[edit]Identifying peer companies
Search the (stock)market for companies most comparable to the target company. From the investor perspective, a peer universe can also contain companies that are not only direct product competitors but are subject to similar cycles, suppliers and other external factors (e.g. a door and a window manufacturer may be considered peers as well).
Important characteristics include: operating margin, company size, products, customer segmentation, growth rate, cash flow, number of employees, etc.
Example:
VirusControl has identified 4 other companies similar to itself.
Medical Sim
Global Plan
Virus Solutions
PM Software
Determining correct Price Earning Ratio (P/E)
The price earnings ratio (P/E) of each identified peer company can be calculated as long as they are profitable. The P/E is calculated as:
P/E = Current Stock Price / (Net Profit / Number of shares)
Particular attention is paid to companies with P/E ratios substantially higher or lower than the peer group. A P/E far below the average can mean (among other reasons) that the true value of a company has not been identified by the market, that thebusiness model is flawed, or that the most recent profits include, for example, substantial one-off items. Companies with P/E ratios substantially different from the peers (the outliers) can be removed or other corrective measures used to avoid this problem.
Example:
P/E ratio of companies similar to VirusControl:
Determining future company value
The value of the target company after the forecast period can be calculated by:
Average corrected PER * net profit at the end of the forecast period.
Example:
VirusControl is expecting a net profit at the end of the fifth year of about € 2.2 million. They use the following calculation to determine their future value:
((17.95 + 21.7 + 20.8) / 3) * 2.200.000 = € 44.3 million
Determining discount rate / factor
Determine the appropriate discount rate and factor for the last year of the forecast period based on the risk level associated with the target company
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