Per-share numerot ja price multiples

Question 1

Mitä on per-share financial numbers?

Answer 1

Tunnuslukuja, joiden laskuissa käytetään osamääränä osakkeiden lukumäärää.

Key financial statement items are also calculated as per-share numbers
–> A given financial statement number is divided by the number of shares outstanding

Question 2

Kerro 3 esimerkkiä per-share financial numbereista?

Answer 2

Per-share numbers typically include:

– Earnings per share
– Dividends per share
– Book value of equity per share

Question 3

Earnings per share (EPS)

Answer 3

Earnings per share (EPS) is calculated as a company’s profit divided by the outstanding shares of its common stock.

Ilmaistaan valuutassa esim 2.10 €.

Question 4

What is IAS 33?

Answer 4

IFRS standard IAS 33 ‘Earnings per Share’ that describes how earnings are divided by the number of shares outstanding…

IAS 33 requires firms to disclose basic AND diluted earnings per share numbers

-> US GAAP requires essentially the same!

Question 5

Calculate:

a) EPS (basic)
b) EPS (diluted)

• Earnings: 123 200 000

Weighted average number of shares during the year: - Basic 73 809 855

• Effect of dilutive share-based incentive plans: 189 324
• Diluted: Basic + Effect of…

Answer 5

EPS = earnings per share / number of shares

EPS (basic) = 123 200 000 € / 73 809 855 shares = 1.6691 = 1.67 €

Diluted number of shares = 73 809 855 + 189 324 = 73 999 179

EPS (diluted) = 123 200 000 / 73 999 179 = 1.6648 = 1.66 €

Question 6

Dividend per share (DPS)

Answer 6

Dividend per share (DPS)

= total dividends paid / weighted average # of shares outstanding

Question 7

Book value of equity per share (BPS)

Answer 7

Book value of equity per share (BPS)

= book equity / weighted average # of shares outstanding

Question 8

Mitä yhteistä on tunnusluvuilla:

Book value of equity per share (BPS)

Dividend per share (DPS)

Answer 8

• These per-share numbers are frequently used in financial statement analysis
• They are not regulated by IFRS

Question 9

Price-to-Earnings ratio = P/E-ratio?

Answer 9

P/E-ratio = Stock price / (forecasted) EPS

It is a price multiple.

It reflects the relative valuation of a stock given the current stock price and EPS.

Price-to-earnings ratio indicates how earnings ‘taste’ for
investors.

Question 10

Why P/E-ratio changes over time?

Answer 10

P/E-ratio changes over time for two reasons:

– Earnings per share (EPS) changes
– Stock price (P) changes

Question 11

What Market-level P/E-ratio predicts?

Answer 11

• Market-level P/E-ratio predicts long-term stock returns

Question 12

Does the firm-level P/E-ratio predict stock returns?

Answer 12

YES!
There is a huge literature showing that the firm-
level P/E ratio predicts stock returns.

Question 13

How to use forecasted EPS, DPS and P/E ratio to calculate expected stock return?

Answer 13

1. Forecast EPS over next few years
2. Calculate the average P/E-ratio over past years
3. Calculate the forecasted stock price by using forecasted EPS and P/E ratio
   - -> P/E = P/EPS
   - -> P=P/E×EPS
4. Include forecasted dividends (DPS)
5. Calculate the expected return

Note: This methodology is very sensitive to forecast errors in EPS, and hence applies only to firms with a very strong and
predictable business!

Question 14

Past growth rates

Answer 14

Firms like Novo Nordisk have very steadily growing EPS and DPS numbers

– Similar firms are e.g. Coca Cola, IBM, Kone and McDonalds
– These firms have a very strong underlying business

Question 15

Steadily growing EPS

Answer 15

For firms with steadily growing EPS, you can estimate EPS growth rate from past earnings, and then use the past growth rate as a starting point to forecast future earnings

Question 16

Does purchasing price matter a lot when calculating expected return?

Answer 16

The level of the purchasing price matters a lot for the level of expected return.

In Feb-March, 2014, stock price of Novo Nordisk was
230
• If stocks were purchased at that price, the expected annualized stock return would have been: 8.8%

In October - November, 2013, stock price of Novo Nordisk was
180
• If stocks were purchased at that price, the expected annualized stock return would have been: 18.1%

Timing the purchase by few months earlier increased the expected annual return from 8.8% to 18.1% !!

Question 17

Stock price increases, but the stock becomes cheaper in terms of its P/E ratio!

Answer 17

= Earnings of the firm (E) increase more than stock price (P)

Question 18

Stock price decreases, but the stock becomes more

expensive in terms of its P/E ratio!

Answer 18

= Earnings of the firm (E) decrease more than stock price (P)

Question 19

P/E ratio does not change, but stock price goes heavily up or down

Answer 19

= Earnings and stock price move at the same pace keeping P/E ratio unchanged

Question 20

If you want to invest, look for companies, where?

Answer 20

Look for companies, where

– Earnings are temporarily low, and/or
– Stock price is temporarily low

• > Double effect expected due to the future:
  1. P/E-ratio ’expansion’ and
  2. Earnings increase

Question 21

Avoid investing in companies, where?

Answer 21

Avoid investing in companies, where

– Earnings are exceptionally high, and/or
– Stock price, i.e. pricing of earnings, is also at an exceptionally
high level

-> An excellent company may be a bad investment!

Question 22

P/D ratio

Answer 22

• The price/dividends ratio is calculated by dividing stock price (P) by the dividends per share (DPS)
– P/D = P/DPS

• The logic of P/D ratio is similar to that of the P/E-ratio
-> Recall that dividends are the part of earnings that is not reinvested to the firm

• Can be used to calculate the expected return on a stock

Question 23

Can P/D ratio also predict long-term stock returns?

Answer 23

YES!

Robert Schiller and many others have shown that the market-level P/D ratio predicts long-term stock returns.

Question 24

P/B ratio

Answer 24

• Price/Book ratio is calculated by dividing stock price (P) by the book value of equity per share (BPS)
– P/B = P/BPS

• High P/B ratio indicates high growth prospects for the firm

Question 25

How can firm valuation be performed?

Answer 25

Firm valuation:

1. Price multiples
2. Valuation models
   - > Current stock price is a function of future discounted earnings, cash flows or dividends

Question 26

Financial statement analysis:

What drives current earnings?

Answer 26

What drives current earnings?

• Profit margins
• Efficient use of capital
• Use of financial leverage

Question 27

Financial statement analysis:

How to predict future earnings?

Answer 27

How to predict future earnings?

• Growth

Question 28

Financial statement analysis:

What are the risks related to future
earnings?

Answer 28

What are the risks related to future
earnings?

• Liquidity
• Financial leverage

Question 29

WHY key financial statement items are often reported as per-share numbers?

Answer 29

Key financial statement items are often reported as per-share numbers

b ecause they allow a direct comparison with stock price.

Question 30

What do price multiples indicate?

Answer 30

Price multiples indicate the relative valuation of a stock.

Price multiples can be used to calculate the expected return on a stock.

Question 31

What may per-share numbers and price multiples provide you?

Answer 31

Per-share numbers and price multiples may provide you with a very useful short-cut financial analysis of the company