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P/E Ratios
The P/E ratio is the amount of money someone is willing to pay to get 1 of earnings It could be considered a popularity contest
In general - the faster a company is growing,
P/E Ratios
What is a good P/E or a bad P/E
It depends!!!!
Look at past history of P/E ratios
P/E Ratios
In general, the faster a company grows - the higher the P/E ratio
As the growth of a company slows over time -
P/E Ratios
Different types of industries tend to have different P/Es - even if the growth rates are similar Part 3 of the Stock Selection Guide helps us determine the normal range of high and low P/E
P/E Ratios
Dont buy a stock just because the P/E ratio is low Do more research - try to discover why it is
low There may be bad news and it deserves to be low The future growth prospects are the real driving force
P/E Ratios
There are 6 basic ways a company can increase earnings
Reduce costs Raise prices Open more stores/expand Sell more in existing markets Fix or sell losing operations Lower taxes paid
PE Ratio
Helps in
Valuation
EXERCISE
COMPANY A NO. OF SHARES 2 LACS MARKET VALUE PER SHARE RS.25 EPS RS.3.125 COMPANY B NO. OF SHARES 1 LAC MARKET VALUE RS.18.75 EPS RS.2.5
CONCLUSIONS
EXCHANGE AT EPS NO EFFECT ON EPS AFTER MERGER
EXCHANGE MORE THAN EPS RATIO
COMPANY WITH LOWER EPS GAINS IF LESS THAN EPS RATIO COMPANY WITH HIGHER EPS BEFORE MERGER GAINS
P/E RATIO = MP/EPS EPS = EAT/NO. OF EQUITY SHARES MARKET PRICE = P/E (NO. OF TIMES) * EPS
EXAMPLE
PRE MERGER SITUATION EAT NO. OF SHARES EPS FIRM A FIRM B
P/E RATIO(TIMES) MARKET PRICE PER SHARE(MPS) TOTAL MARKET VALUE (N*MPS) OR (EAT*P/E RATIO)
8 25 50,00,000
POST MERGER
SITUATION 2
8.75/2.8=3.125 8
3.125*8=25
21.825
70,00,000
65,47,500
CONCLUSION
FIRM WITH HIGHER P/E RATIO CAN ACQUIRE FIRM WITH LOWER P/E RATIO WHICH WILL INVARIABLY INCREASES
THANK YOU