BBK34133 | Investment AnalysisPrepared by Dr Khairul Anuar

L8 – Valuation of Shares

Content

• The price/earnings ratio (P/E) is the best known of the

investment valuation indicators.

• The P/E ratio has its imperfections, but it is nevertheless the

most widely reported and used valuation by investment professionals and the investing public.

• The financial reporting of both companies and investment

research services use a basic earnings per share (EPS) figure

divided into the current stock price to calculate the P/E

multiple (i.e. how many times a stock is trading (its price) per

each dollar of EPS).

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Valuation Process

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Price/Earnings Ratio

• The price/earnings ratio (P/E) is the best known of the

investment valuation indicators.

• The P/E ratio has its imperfections, but it is nevertheless the

most widely reported and used valuation by investment professionals and the investing public.

• The financial reporting of both companies and investment

research services use a basic earnings per share (EPS) figure

divided into the current stock price to calculate the P/E

multiple (i.e. how many times a stock is trading (its price) per

each dollar of EPS).

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Price/Earnings Ratio

• It's not surprising that estimated EPS figures are often very

optimistic during bull markets, while reflecting pessimism during

bear markets.

• Formula:

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Price/Earnings Ratio

• Illustration of calculation:

• Information on Valaria Berhad

Share price on 1 May 2015 = $67.44

Earnings = $732.5 million

No. of shares outstanding = 247.1 million

1. Calculate the EPS EPS = Earnings /No. of Shares in issue

= $732.5 / 247.1 = $2.96

2. Calculate the P/E Ratio P/E Ratio = $67.44 / $2.96 = 22.78x

This means that investors would be paying $22.80 for every

dollar of Valaria‘s earnings.

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Price/Earnings Ratio

• A stock with a high P/E ratio suggests that investors are expecting higher earnings growth in the future compared to the overall market, as investors are paying more for today's earnings in anticipation of future earnings growth.

• Hence, as a generalization, stocks with this characteristic are considered to be growth stocks.

• Conversely, a stock with a low P/E ratio suggests that investors have more modest expectations for its future growth compared to the market as a whole.

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Price/Earnings Ratio

• The growth investor views high P/E ratio stocks as attractive buys and low P/E stocks as flawed, unattractive prospects.

• Value investors are not inclined to buy growth stocks at what they consider to be overpriced values, preferring instead to buy what they see as underappreciated and undervalued stocks, at a bargain price, which, over time, will hopefully perform well.

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'Price-To-Book Ratio - P/B Ratio

• A ratio used to compare a stock's market value to its book value. It is calculated by dividing the current closing price of the stock by the latest quarter's book value per share.

• Also known as the "price-equity ratio".

'Price-To-Book Ratio - P/B Ratio

• A lower P/B ratio could mean that the stock is undervalued.

• However, it could also mean that something is fundamentally wrong with the company. As with most ratios, be aware that this varies by industry.

• This ratio also gives some idea of whether you're paying too much for what would be left if the company went bankrupt immediately.

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'Price-To-Book Ratio - P/B Ratio

• Syntax Berhad

No. of shares oustanding = 10 million shares

Book value per share = $2.50

Market price = $5

P/B Ratio = (5/2.50) = 2

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Industry Analysis

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Industry Analysis

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Industry Analysis

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Industry Analysis

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Industry Analysis

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Industry Analysis

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Industry Analysis

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Industry Analysis

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