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QuestionsCategory: Investor PsychologyValuation Quadrant Stock splits
Choon Yip Kok asked 1 year ago
2 Answers
Victor Chng answered 1 year ago

Hi Choon Yip,
I can;t quite get what you are trying to ask. You may want to share more in details so I can guide you from here.

Choon Yip Kok replied 1 year ago

Hi i am trying to ask if there is any additional steps required to amend for the EPS when using the PE valuation metric. For example i am looking at ISRG and there was a 3 for 1 stock split in 2017. If i were to calculate the PE ratios normally, the PE for years before the stock split seems distorted at around 10 and jumping to 30-40 and beyond for years after the stock split.

The PE ratio appears to be normalized after dividing the EPS by 3 for years before the stock split. Is this the right way to approach this?

Also, when inputting the no. of shares, for example for 2019, should i get the no. of shares as at 31 Dec 2019 in the “Consolidated Statements of stockholders’ equity” at 116.0 or the “Diluted shares used in computing net income per share attributable to Intuitive Surgical, Inc.” from the “Income statement” at 119.5?

Victor Chng answered 1 year ago

Hi Choon Yip,
1.If the company have stock split then you need to adjust the numbers of share for the years before the stock split. In the case of ISRG, stock split happen in 2017 so you need to adjust the share outstanding before year 2017. The stock split is 3 for 1 splits means every 3 shares you get 1 new shares so the gain is 33% (1 divided by 3). So for the years before 2017, you just need to multiply by 1.33.
2.You should take the diluted shares as the figure is more conservative.