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Clarification

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Cecilia Lui asked 6 years ago

Hi Victor, In the video that you touch on the price/earning ratio.
You shown us how to use p/e to find out the intrinsic value of vicom and the the margin of safety is 17,1%.
However if according to your formula:-
margin of safety =intrinsic value – share price/ intrinsic value
ie  $6.85 – 5.85 = $1.00
     $1.00/$6.85 x 100% = 14.60%
it worked out the margin of safety is only 14.60%. Please clarify. Thanks
 

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Victor Chng answered 6 years ago

Hi Cecilia,
Thank you for pointing out the mistake. I realised I divided by the wrong denominator. Your answer is correct.
 

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Cecilia Lui answered 6 years ago

May I Know what to find the Historical p/e ratio chart as shown in the example? Thank you.

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Victor Chng answered 6 years ago

Hi Cecilia,
 
You download the share price for the company from yahoo finance then you use excel and plot out the PE chart by inputting the earnings per share figure in excel to compute the PE.

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Cecilia Lui answered 6 years ago

Hi Victor, so if I were to plot a p/e chart for 5 years. I will use the eps respectively for yr 1, yr 2, yr 3, yr 4 and yr 5. Correct?

Victor Chng replied 6 years ago

Hi Cecilia,

Yes you are right if you are finding the historical PE

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Cecilia Lui answered 6 years ago

Referring to the above case of vicom intrinsic value of $6.85. The margin of safety is 14.60%. This margin of safety help to protect the downside.
If I am looking at 15% return , what is the entry price to buy vicom?

Victor Chng replied 6 years ago

To get a return of 15% is rather subjective as it highly depend on the growth factor of the business. There are cases where companies trade at fair value without any margin of safety and they are still able to generate a return of more than 15%.

There is another way I look at which may help you if you want to gauge your the return but I suggest you not to fully rely on it. For instance, a company have a ROE of 20% and they consistently give out 50% of the profit as dividend. Hence we can safely say that if the company continue to generate the same ROE and give out 50% of profit as dividend, their sustainable growth rate is around 10% (0.5*20%). Hence if the company currently giving me around 5% dividend yield than my chance of getting 15% return in a long run should be high because 10% (sustainable growth) plus 5% (Dividend yield).