Market Valuation Ratios Across ShareInvestor Platforms

In finance and investment, the term “company valuation” is ubiquitously mentioned.

Valuation metrics can be broadly divided into two categories.

  • Enterprise Value Multiples
  • Equity Value Multiples

Both of them are expressed in terms of market value relative to the underlying value driver of that market value. Market value is measured by the listed company’s share price.

The subject matter of this blog posting is on “Equity Value Multiples“. Example of such multiples include popular market ratios such as P/E and Price/NAV. In this regard, several of our membership subscribers have raised queries on the computation of these multiples in our platform. Specifically, when we calculate these ratios, what is the share price used in the computation. Are they based on the historical share price or the current share price.

The table below outlines the three pricing bases used by industry practitioners in computing multiples as well as the practice adopted by ShareInvestor in the computation of our Valuation ratios.

Source: ShareInvestor.com

Let’s use the above example to illustrate. The “Valuation Ratios (Historical)” in the Financials page in ShareInvestor above are computed using the average of the daily closing prices over the respective financial period and the historical financial data for the corresponding period. In the example above, this indicates that a company’s stock was historically trading at growing P/E multiples in the range of 21.30x to 44.04x for the financial years ended 31 Dec 2009 to 31 Dec 2011.

In the case of P/E, the higher the P/E ratio, the higher the value attributed to future cash flow of a company and hence the greater the premium an investor is paying for the stock of the company.

Source: ShareInvestor.com

Source: ShareInvestor.com

If we look at the “Valuation Ratios (Adjusted)” table above for the same company, we see a different picture. These ratios are computed based on the current last done share price of S$0.305 and historical financial data for the respective financial periods. The number of shares used in the computation above have also been adjusted for the effects of corporate actions. This reveals that the company is trading at a lower premium to its EPS with each passing financial year after accounting for a 2-for1 share split in May 2012. The P/E has gotten lower each year from 43.97x to 36.65x for the financial years ended 31 Dec 2009 to 31 Dec 2011.

How are multiples used in valuation?

The above depicts an illustration on two of the common valuation approach using historical and current pricing bases. If we have just rely on the historical pricing base, we would have gotten the impression that the market is willing to pay an increasing higher premium compared to the company’s financial performance. However when we use the current pricing base, the opposite picture emerges.

Valuation ratios should never be viewed in isolation in deciding whether the company is fairly valued. We should always look at the financial performance of the company. If the company is in a growing industry and their profits are growing steadily every year, it would not be surprising if the market is willing to accept higher market multiples. The converse is true as well.

As multiples are sensitive to the qualitative operating and financial factors like customer base, seasonality, cyclicality and leverage, investors should note that the choice of the right multiple(s) in valuing and comparing similar companies depends on the nature of the business or the industry in which the company operates in.

 

Educator Index

Archive

2017
May
April
February
2016
November
September
June
May
April
March
February
January
2015
December
2014
December
2012
December
November
July
June
May
April
March
February
January