FINA211 WK10 L19 Stock Valuation using Comparables

Question 1

What is price-to-earnings (P/E) ratio?

Answer 1

Price-to-earnings ratio is a metric that compares a company’s share price to its earnings per share (EPS).
A high P/E ratio could mean that a company’s stock is overvalued; or, that investors are expecting high growth rates in the future.
Companies that have no earnings or that are losing money do not have P/E because there is nothing to put in the denominator.

Question 2

What is the formula for P/E ratio?

Answer 2

SP/EPS
where
SP = share price
EPS = earnings per share

Question 3

How do you estimate market value of equity using the P/E ratio?

Answer 3

SP/EPS = (SPOS)/(EPSOS) = MV.equity /NI

SP/EPS = (SPOS)/(EPSOS)
(SPOS)/(EPSOS) = MV.equity /NI
SP/EPS = MV.equity /NI

MV.equity = (SPOS)/(EPSOS)NI
MV.equity = SP/EPSNI

Question 4

What is enterprise value (EV)?

Answer 4

Enterprise value is a measure of a company’s total value, often used as a more comprehensive alternative to equity market capitalisation.
Its calculation includes the market capitalisation of a company, but also short-term and long-term debt and any cash or cash equivalents on the company’s balance sheet.
The components of EV include:
Market Capitalisation/Market Value of Equity, MC/MV.equity
Debt, Total Debt/MV.debt
Cash and cash equivalents, C

Question 5

What is the formula for EV?

Answer 5

EV = MV.equity + MV.debt - C
where
Market Capitalisation/Market Value of Equity, MC/MV.equity
Debt, Total Debt/MV.debt
Cash and cash equivalents, C

Question 6

What is enterprise multiple/enterprise value (EV) multiple?

Answer 6

Enterprise multiple, also known as the EV multiple, is a ratio used to determine the value of a company. The enterprise multiple, which is enterprise value divided by earnings before interest, taxes, depreciation, and amortization (EBITDA), looks at a company the way a potential acquirer would by considering the company’s debt.
The EV of a company tells interested parties a company’s value and how much they would need if they were to purchase that company.

Question 7

What is the formula for EV multiple?

Answer 7

EV multiple = EV/EBITDA
where
EV = Enterprise Value
EBITDA = Earnings before Interest, Tax, Depreciation, and Amortisation.

Question 8

What is the advantage of the EV multiple over the P/E ratio?

Answer 8

EV multiple takes into account debt, whereas P/E ratio does not.