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Valuation Quadrant – P/E Ratio

Questions › Category: Valuation Quadrant › Valuation Quadrant – P/E Ratio
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Wilfred Yang asked 3 years ago

Hi
I have some questions after looking the P/E ratio video.

  1. For the historical P/E chart for Vicom, is that the median or the average? I gather from the video on plotting the P/E chart that we should just use the median all the time instead of the average?
  2. For the same chart, are the lines above and below the average +1 standard deviation and -1 standard deviation respectively?
  3. What is net cash per share/net debt per share? How do you calculate this? Can you shown an example of this calculation using any FS?
  4. Any ways that we can tell quickly if a company has predictable revenue and earnings?
Wilfred Yang replied 3 years ago

Just to add on some more questions:
5. There was this line “To take growth into account, investors usually use the Price/Earnings to Growth ratio.” How is this computed? Where do you the the growth rate from? Is it the CAGR of the profit after tax?

6. You mentioned you typically use the previous full year EPS and apply it to the price from 1 Mar to 28 Feb of the next year. However, this is only applicable for companies that close their FY in Dec? For those that close their FY in other months, we make the +2 months adjustments as well?

2 Answers
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Jieren Zheng answered 3 years ago
  1. I think the point is to not allow extremes to skew your averages. Just be consistent whichever method you pick.
  2. I think it is the recent years high and low PE
  3. Take total cash or debt (from the balance sheet) and divide by outstanding shares.
  4. You\’ll need to see the business model and how it makes money, such as subscriptions, mandated inspections.
  5. Growth rate is usually based off the recent years net profit growth. The formula is PE divided by growth rate.
  6. You can use their financial year, be it June, April or December, no need to adjust.

 

 

 

Victor Chng replied 3 years ago

Thanks JR

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Victor Chng answered 3 years ago

Hi Wilfred,
 

  1. This point is what JR had mentioned above but I will usually use average PE but when there is a sudden skew in their PE valuation then I will use median PE. 
  2. For Vicom case, is the recent high and low PE as what JR had mentioned but my suggestion is use standard deviation (SD) will be better. Moving forward, we are using more SD.
  3. As what JR had mentioned but moving forward we will remove this segment is the valuation including or excluding net cash or debt respectively can be too aggressive or conservative. 
  4. As JR mentioned.
  5. As JR mentioned.
  6. Yes, just +2 month to the FY.
Wilfred Yang replied 3 years ago

Thanks Jieren, Victor.

Victor Chng replied 3 years ago

Welcome :)