Business Valuations (2) Flashcards
What is a high PE ratio
Expectations of high future growth
A low risk company from business or financial risk
How is the income-based value calculation?
Earnings of target * Appropriate P/E ratio
What does the P/E ratio produce?
An earnings-based valuation of shares
Issues with PE method?
Choice of which PE ratio to use
Earnings calculation
Stock market efficiency
When is the value of the PE ratio normally reduced?
If company that is being valued is unlisted
Why do listed companies have a higher value?
Mainly due to greater ease in selling shares in a listed company
What should the PE ratio reflect?
The business and financial risk of the company that is being valued
When do earnings need to be adjusted/
By the target company if it includes one-off items will tend to not recur
What do historic earnings not reflect?
Pontential future synergies (e.g. cost savings or revenue increases) that may arise from an acquistion
When may stock markets not be efficient?
They are affected by psychological factors, distorting the PE
What does the arning yield method produce?
An income-based valuation of shares through earnings / share price
