My method of analyzing stocks. Fa coefficients What is p b
Benjamin Graham In honor of the site reconstruction, I decided to write a new article on how to properly form an investment portfolio using ratios. This principle is widely used by portfolio managers around the world and was described by Graham in the famous book "The Intelligent Investor".
To make the article useful to a wide range of novice investors, I will try to describe each step of determining the fair value of shares, and also create a special one where I will regularly publish the calculated coefficients.
Courtesy of site visitors website I will not delve into the theory of the issue, but will show a practical example of calculating the coefficients p / b and p / e. So let's get started.
Let's calculate p / b and p / e ratios for Rostelecom shares
It seems to me that Rostelecom shares should be in the portfolio of every self-respecting investor. The fact is that from old memory I know how well this company is doing, and I am also its subscriber (Internet, telephony). I know how effectively this business is organized from the inside.
But recently (as of May 11, 2014), Rostelecom's shares have sagged quite noticeably. The share of this issuer's shares in my portfolio is as follows: ordinary - 7.49%, preferred - 14.21%. Agree that the share of Rostelecom in my portfolio is quite high, but I plan to increase it further, so I need to better study the financial statements of this company and assess how overvalued / underestimated the shares of Rostelecom are.
Step-by-step analysis of Rostelecom's quarterly reporting
- First, we need to go to the Rostelecom website to find its statements there.
Each issuer is obliged to publish reports (annual and quarterly). 
For long-term investors, it is enough to study the annual reports, but it will be more interesting for us to get acquainted with the more relevant - quarterly. 
To do this, using the navigation on the site, we find the appropriate section. The sequence of actions is shown in the photo. We will study the report for the 4th quarter of 2013. 
- Next, you need to determine how many shares were issued by the issuer - we are interested in the quantity: ordinary and preferred shares... Each report has a standardized form, therefore, in any report that you begin to analyze, this will be clause 8.2
The first on the list are ordinary shares, we are interested in the number of shares in circulation - 2 669 204 301 units. We write down this figure.
We find preferred shares - their number: 242 831 469 pcs. 
Please note that the number of shares in the reports for the 3rd and 4th quarters is slightly different, so we will use data on the number of shares from the report for the 4th quarter to analyze Rostelecom shares, and we will take data on liabilities and profits from the report for the 3rd quarter.
- Balance sheet presented on the last page.
First of all, we clarify the unit of measurement so as not to be mistaken in the order of the numbers. In our case, it is thousand rubles (3 more zeros 000 must be added to the figures presented in the report). - Now we turn to the third section of the report - "Liability" - "capital and reserves".
We are looking for the line "total by section III". Here we need to write down two numbers: “on the 30th Sept. 2013 ”and“ as of December 31, 2012 (data of the annual report) ”. You can write out the data for 2011 and calculate the average market capitalization over 3 years - this is what some experts do. The figures of the report for the 3rd quarter - 279 354 617 - remember that we need to add three more zeros to this number + 000 \u003d 279 354 617 000 rubles. - Now is the time to study the "Report on financial results"- for 9 months of 2013.
This report is located under the "Balance Sheet" section that we have just studied.
In this report, we need to find out what profit was announced by Rostelecom for 9 months of 2013. At the same time, remember that the unit of measurement here is the same - thousand rubles, so we keep 3 zeros (000) in mind.
We are looking for the line "Net profit (loss)". Please note that in the event of a loss for the period of interest, the number will be enclosed in parentheses ().
We rewrite the amount that appears in the column "For 9 months of 2013" - 23 585 026 + 000 \u003d 23 585 026 000. You can immediately calculate the average annual profit by the formula (PQ. / Sq.) * 4, where PQ. - Profit for the quarter that we are studying, apt. - the number of quarters (in our case, this is the number 3), 4 - the number of quarters in a year.
- Now, to calculate the coefficients, it remains for us to find out the market value (quotes) of Rostelecom's common and preferred shares. On 04/11/2014: usual - 81.22, prefs - 51.36 rubles.
How to calculate the market cap of a company
First, we calculate the market cap of the company using the formula:
(Aob. * Quoted. Ob.) + (Apr. * Quoted.pr.), Where Aob - the number of ordinary shares, quoted. about. - current quotation of common shares of Rostelecom, Apr. - the number of preferred shares, quoted ex. - quote of preferred shares \u003d 229264597575.06 rubles - market capitalization of the company.
How to calculate the p / b ratio
Now we calculate the p / b ratio using the following formula:
Market k-i / liabilities \u003d 0.82, where Market k-i - market capitalization, liability - the value that we wrote out from the final section lll of the balance sheet.
In other words, the p / b ratio shows the ratio of market capitalization to the company's book value.
How to calculate the p / e ratio
The p / e ratio is calculated using the following formula:
Market k-i / profit \u003d 9.72, where Market k-i is the market capitalization of the company, profit - quarterly, average annual or annual profit - depending on the tasks of your analysis. The p / e ratio shows the ratio of the market capitalization to the company's profit.
What are the p / b and p / e ratios that indicate the undervaluation of stocks?
If the p / b ratio< 1 – это говорит о хорошем соотношении рыночной капитализации компании к её балансовой стоимости. Другими словами акция, у которой p / b< 1 - is underestimated by the market.
For the ratio of market capitalization to the company's profit (p / e), there is another norm - p / e< 20 .
Deviations in multiplier values
For different sectors of the economy, the values \u200b\u200bof the multipliers are not the same. For example, the IT sector allows you to show the best coefficients at the expense of less expensive company assets (equipment, premises, other material objects). For other sectors, such as mining companies, multiples may look more disadvantageous, so compare companies in the same sector and find the optimal ratio yourself.
But, if the company has a negative profit (loss), you should not buy its shares at all until its affairs get better.
Which reports to study - annual or quarterly
Each investor uses its own rules for evaluating companies, so long-term investors mainly use annual reports, and those who are inclined to more dynamic management of their own portfolios study the state of the companies in which they invest every new quarter and, if the value of multiples deteriorates, redistribute assets in favor of other stocks.
When to sell stock
Suppose you purchased a stock that is undervalued by the market, when should you get rid of it? This question can be most simply answered using the this article multipliers - if the value of the coefficients after the growth in the value of shares worsened p / b\u003e 1 and p / e\u003e 20) - boldly sell shares and switch to those securities that are still undervalued by the market.
How to calculate multipliers yourself
To save your time, I will do the following: I will offer you a site where I will publish the p / b and p / e ratios, in addition, you can independently calculate the p / b and p / e ratios using the convenient one.
I also propose to download the Excel file, where you just have to substitute the necessary values, and the table will calculate everything for you.
If you have any questions while reading this article, ask them right here or write a personal letter using the contact form in the "Contacts" section.
Analysis summary: is it worth buying Rostelecom shares
Based on our calculations, we can conclude that Rostelecom shares are undervalued by the market, so I can safely increase the share of these shares in my portfolio. 
When an investor sees a stock price chart, he often wonders whether the current value of the company's business is high or not. To identify fair price the stock and its comparison with the current market using methods that are often based on indicators of quarterly and annual accounting reports... And to compare enterprises with each other and identify priority options for investing money, multipliers are used - financial ratios that compare the company's fundamental indicators with each other.
In the group of income multipliers (which measure the income received by the company with other indicators) there is a multiplier that shows how the current market price corresponds to the book value of assets, moreover, cleared of debt.
Description of the P / B multiplier
The P / B multiplier (Price to Book) shows the ratio of the company's capitalization (Price) to the book value of its assets (Book Value), where capitalization refers to the current market price of the company's share capital, calculated as the market value of a share multiplied by their total issued number ( if the company has both AO and AP, then their total cost is added up). And the book value of assets refers to the company's net asset value, i.e. the total value of assets (Total Assets) minus the total debt (Total Debt), which is determined on the basis of the company's balance sheet as the sum of short-term and long-term debt from the "Liabilities" column.
The number of issued shares of a particular company can be viewed on the Moscow Exchange website in the Listing section, Quantitative Indicators subsection. By the way, the capitalization of the companies is also indicated here. For example, the capitalization of Rosneft at a price of 256.15 rubles per share. will amount to 2 714 723 247 824.55 rubles. the total number of issued shares is 10,598,177,817.
Figure: 1. Capitalization of the company "Rosneft"
It should be understood that in mergers and acquisitions, businesses are sold not by capitalization value, but by completely different principles. However, an investor, when deciding to buy securities, must understand how much the market values \u200b\u200bthe company based on the price per share.
As for the value of assets on the balance sheet, then to calculate them, you should familiarize yourself with the balance sheet (according to IFRS) of the company for the period of interest. As an example, consider the IFRS balance sheet of Rosneft for 2015. It can be seen from this report that the total value of assets - Total Assets - is RUB 9,638 million, but buying the company for this money, we will also receive debt to be repaid. Debt, in turn, is divided into short-term (which must be repaid in the next 12 months) and long-term (repaid in the period after the next 12 months). Short-term debt is presented in the report in the column "Total short-term obligations”And amounts to 1,817 million rubles. As for long-term debt, it is presented in the column “Total long term duties”And amounts to 4,829 million rubles. It turns out that the total debt of the company is equal to 6,646 million rubles. It turns out that the size of the company's own assets is the difference between the "Total assets" and the total debt, i.e. is equal to 2,992 million rubles.
Figure: 2. Balance sheet of Rosneft
Price multiplier / book value is calculated as the quotient of the capitalization value of 2,714,723,247,824.55 rubles by the value of the company's assets, cleared of liabilities, 2,992 million rubles, i.e. is 0.93. If the price / book value ratio is less than 1, this means that the market is underestimating the company. If it is higher, then, on the one hand, it believes in its development, and on the other hand, it already estimates it higher than its actual book value. It should be noted that the book value is a fairly stable indicator, in contrast to the net profit. At the same time, the price / book value of assets is a less volatile indicator than, for example, P / E. But an increase in the price / book value ratio is a positive factor for the growth of the share price.
As for the disadvantages of the method, it must be borne in mind that the balance sheet estimate does not correspond to the real value of the business for sale. The reason is that the balance sheet displays the cost of acquiring an asset minus depreciation, and this does not always reflect current situation... Moreover, the structure of the balance sheet contains tangible and intangible assets. If the first group can still be reasonably estimated, then the cost intangible assets much more difficult to assess. It turns out that the P / B calculation gives the investor a good picture for traditional businesses. But if you evaluate, say, an IT company in this way, you can get a somewhat distorted result. Naturally, the price / book value multiplier must be tracked over time and compared with competitors in the market sector.
Using P / B in conjunction with other multipliers
Traditionally, a company is assessed not only by balance, but also by profit, as well as taking into account profitability. The fact is that the value of a company's assets can be high and even show growth, but if the company does not show profit, the market is unlikely to give it a high rating. Therefore, for a more correct interpretation of P / B, it should be evaluated together with P / E, and if we take into account the volatility of net profit, then also with P / S, since revenue is less volatile than profit. A positive moment will be the joint growth of these indicators - this will indicate that the company is increasing revenue (expanding the industry) and increasing profits (converting revenue into profit), as well as expanding, increasing the value of assets, which will indicate the most likely growth in stock prices ... Also, do not forget that assets must be profitable. To determine this parameter, the ROE (Return on Equity) ratio is used, which correlates net assets companies with a net profit, showing the ability of assets to generate profit. It is good when, during the growth of the price / book value ratio, the profitability also increases.
Conclusion
For a correct fundamental assessment of a company, it is necessary to use not one multiplier, but several that evaluate the business both in terms of profitability and profitability, without forgetting about financial stability and solvency.
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And how to use them
Can an investment in M-Video be about the same profitability as in a car wash?
Roman Koblenz
Shares of undervalued companies bring more predictable and stable income, and they are also less susceptible to the risk of drawdown due to a crisis or extraordinary events
Now let's look at the examples of the main multipliers.
More than zero, less is better
P / E - price to earnings 
P / E is the ratio of the company's price to profit. More precisely, the market price of a share to net earnings per share. Or the market capitalization of the entire company to annualized net income.
The price-to-earnings ratio is the main indicator. It reflects how many years the company pays for itself, and allows comparing companies from different industries. If this multiple is between 0 and 5, then the company is undervalued. If it is more, it is probably overrated. A multiple of less than 0 indicates that the company has made a loss.
But you have to understand that it is rash to simply compare two fundamentally different companies on the same P / E ratio. One company can have large capital expenditures early on that eat up a lot of profits. And in another, the profit is much less, but capital expenditures less, which makes its P / E look better.
P / E is a good indicator, but not the only one.
P / E of Rosneft and Gazprom
In this and other tables, the multipliers are calculated based on the results of 2016 according to financemarker.ru
Market capitalization
Rosneft
4200 billion rubles
Gazprom
3600 billion rubles
Profit for the year
Rosneft
201 billion rubles
Gazprom
411 billion rubles
P / E multiplier
Rosneft
Gazprom
Zero to one is good
P / S - price to sales 
The P / S multiplier is the ratio of the market price of a share to earnings per share. It is used to compare companies in the same industry, where margins will be at the same level. Best suited for industries where revenue is believed to consistently generate consistent amounts of profit or cash flow, such as trading.
A coefficient value less than 2 is considered normal. P / S less than 1 indicates undervaluation. The advantage of P / S is that it can be calculated for all companies, since its value is only positive, because revenue can only be positive.
P / S for NKHP and M-video
Capitalization and revenues are indicated in billion rubles
Market capitalization
15 billion rubles
"M Video"
69 billion rubles
4.7 billion rubles
"M Video"
183 billion rubles
Multiplier P / S
"M Video"
Less than one is good
P / BV - price to book value 
The P / BV multiple is the ratio of the market price of a share to the value of assets per share. It is convenient to use it to compare banks, because the assets and liabilities of banks almost always correspond to their market value... P / BV does not talk about the company's ability to make a profit, but gives an idea of \u200b\u200bwhether the shareholder is overpaying for what remains of the company in the event of an instant bankruptcy.
P / BV less than one is good. More than one ruble of the company's real value falls on 1 ruble of market capitalization. If the company goes bankrupt and shareholders are allowed to return their shares, then they will have something to return.
P / BV more than one is bad. There is less than one ruble of the company's real value per ruble of market capitalization. If the company goes bankrupt and the shareholders are allowed to return the shares, then there will not be enough for everyone.
P / BV banks "Otkritie" and "St. Petersburg"
Capitalization and assets are indicated in billion rubles
Market capitalization
"Opening"
315 billion rubles
"St. Petersburg"
29 billion rubles
Own assets of the company
"Opening"
155 billion rubles
"St. Petersburg"
60 billion rubles
P / BV multiplier
"Opening"
"St. Petersburg"
EV - enterprise value
The EV multiple is the company's fair value. Defined like this: EV \u003d Market Cap + All debentures - Available cash companies.
Look at two companies and tell me which one will cost you more to buy?
EV RusHydro and Inter rao
Capitalization, debt and available money are indicated in billion rubles
RusHydro
Capitalization
358 billion rubles
332 billion rubles
Available money
67 billion rubles
623 billion rubles
"Inter rao"
Capitalization
396 billion rubles
152 billion rubles
Available money
96 billion rubles
452 billion rubles
RusHydro's price for stock market - 358 billion rubles, the price of Inter RAO is 396 billion. It turns out that Inter RAO is as much as 38 billion rubles more for you. But in reality it is not, and EV explains it to us:
- After purchasing RusHydro you will receive debts for another 332 billion rubles, and the cash desk will be 67 billion - it turns out that the company will actually cost you 623 billion rubles.
- And if you buy "Inter Rao" for 396 billion rubles, then you will also receive its cash in the amount of 96 billion. The debt will be 152 billion, which will give a total real value 452 billion rubles. It turns out that in fact, RusHydro is more expensive, and by as much as 171 billion rubles.
EV - very important indicator by itself, but its main benefit is in comparison with the following indicator.
EBITDA
The EBITDA multiplier is the company's earnings before interest, taxes and depreciation.
We need EBITDA to understand how much profit the company's business directly brings. Does the company know how to make money?
To put it even simpler, EBITDA is how much a company would earn in ideal conditions if it already had all the factories, the machines did not wear out, and the state introduced a zero tax rate for it.
A separate benefit of the EBITDA multiplier is that it allows you to conveniently compare companies in the same industry, but from different countries... After all, if in one country the tax is 13%, and in another 50%, then, having the same profit from business, we will receive different net profit. EBITDA earnings will be the same.
EBITDA "RusHydro" and "Inter rao"
Profit, amortization and expenses are shown in RUB billion
RusHydro
Profit before taxes
55 billion rubles
Depreciation
24 billion rubles
Interest expense
(−0.902) billion rubles
78.1 billion rubles
"Inter rao"
Profit before taxes
68.5 billion rubles
Depreciation
23 billion rubles
Interest expense
14 billion rubles
105.5 billion rubles
More than zero, less is better
EV / EBITDA 
The EV / EBITDA multiple is the market value of a unit of profit.
This indicator is used to compare companies that operate in different accounting and tax systems. It is similar to the P / E you already know - price-to-earnings ratio. But only now, instead of market capitalization, we see the company's real market price. And instead of net profit - a more reliable EBITDA value.
Remember when we said that it is incorrect to compare companies from different industries and in different life phases by P / E? The problem was that we were dividing the market cap by profit after all payments, taxes and capital expenditures. And now we are looking at cleaner and more reliable indicators - by which companies can already be compared with more confidence.
EV / EBITDA RusHydro and Inter rao
All indicators, except for multipliers, are indicated in billion rubles
Market capitalization
RusHydro
358 billion rubles
"Inter rao"
396 billion rubles
Total debt
RusHydro
332 billion rubles
"Inter rao"
152 billion rubles
Company cash
RusHydro
67 billion rubles
"Inter rao"
96 billion rubles
RusHydro
"Inter rao"
Profit before taxes
RusHydro
55 billion rubles
"Inter rao"
68.5 billion rubles
Net profit
RusHydro
39.8 billion rubles
"Inter rao"
61.3 billion rubles
Depreciation
RusHydro
24 billion rubles
"Inter rao"
23 billion rubles
Interest paid
RusHydro
"Inter rao"
RusHydro
"Inter rao"
RusHydro
"Inter rao"
RusHydro
"Inter rao"
The calculated EV / EBITDA multiple shows us that the real state of affairs of both companies is better than a quick P / E calculation suggests. The companies have a very powerful infrastructure, on which depreciation is written off 23-24 billion rubles a year. A significant part of Inter Rao's profits also goes towards debt repayment. And this is an additional 14 billion in profits that the company can add after paying off the debt. All of this is accounted for in EV / EBITDA and not accounted for in P / E.
EV / EBITDA is measured in the same way as P / E - the smaller the better, and a negative value usually indicates a loss.
If we limited ourselves to P / E comparisons, then both companies would not seem attractive to us. However, a more accurate and detailed EV / EBITDA showed that Inter rao is not just the clear favorite in this comparison, but that the shares of this company are in principle a good idea to buy.
Less is better
Debt / EBITDA 
The Debt / EBITDA multiplier reflects the number of years it takes a company to pay off all debts with its profit. The fewer the years the better.
Investors often look at the EV / EBITDA and Debt / EBITDA multiples first. Often they are combined into one bubble chart, where the X-axis is EV / EBITDA, the Y-axis is Debt / EBITDA, and the size of the circle is determined by the company's capitalization. Then, in this way, all companies of the same industry are placed on the chart:
The most undervalued companies in this visualization will be at the bottom left, near the origin. To a reasonable investor all that remains is to choose a company from the bottom left, study it and invest.
Growth - good
EPS - earnings per share 
The EPS multiplier is the net profit per common share... Measured as the ratio of earnings per share. For the analysis, EPS growth is often used, that is, the percentage change in the past EPS indicator to the current one. Very often, a sharp rise or fall in profits is a harbinger of a corresponding change in the share price.
For example, at the end of 2016, Detsky Mir showed a 291% profit growth. After leaving financial report the share price has risen by 35% and is now in an upward trend.
At the end of 2016, the Dixy retailer showed a 573% drop in profit. After the release of the financial report, the share price fell by 35% and is now in a downtrend.
At the same time, you should not rely heavily on EPS changes. Better to use this multiplier like additional criterion selection, when the screening has already been made according to the main multipliers discussed above.
Bigger is better
ROE - return on common equity 
The ROE multiplier is the return on equity as a percentage per annum, that is, the return on equity. It can be used to judge the effectiveness of the company.
For example, let's take two car washes: the first is designed for 30 cars, and the second for 5. The first has much more own assets: more land area, more car wash building itself, more equipment. But if at the same time both car washes generate the same profit, we will see a skew in the ROE indicator: it will be much higher for a small car wash. ROE will inform us that a small car wash is more efficient and that the equipment purchased (equity) pays off much faster. So we, as investors, will choose a car wash for 5 cars.
And what if we compare the ratio of Yandex's profit to revenue and, for example, the profit of the Magnit network to revenue? Business profitability is completely different, so this comparison is not always correct.
A smart investment strategy is to find the best multiplier companies in each industry and build a diversified investment portfolio.
Another feature of using multipliers relates to financial statements banks. You will not find revenue in it, and bank debts cannot be counted in the way we count them for ordinary companies. That is why we cannot use a number of multiples to compare banks, namely: P / S, EV / S, EV / EBITDA, debt / EBITDA. The most versatile P / E and P / BV can be used instead.
Remember
- Multipliers reflect the relationship between a company's market capitalization and the financial performance of a business. This helps to compare different companies on the same scale.
- Undervalued companies are at lower risk.
- Companies should be analyzed on the basis of multiples based on the totality of all indicators, not one at a time.
- Multipliers are best used to compare companies in the same industry, thus adding the best companies from each sector to your portfolio.
Igor Dombrovan, Managing Director of Saxo Bank in Russia
P / E and P / B ratios due to their elementary nature, they are among the most frequently used financial indicators... However, this simplicity is fraught with serious negative consequences for investors and.
Price / Earning Ratio
P / E ratio (the ratio of the market price of a share to the net profit per share) depends on the stability of profits, so this indicator is considered especially important and illustrative in relation to sustainable and / or low-risk companies. Best to measure efficiency price / earnings ratio It is possible to use the example of enterprises with slow but stable growth of profits or incomes, since the value of the profit component in this coefficient is not prone to abrupt changes - these can be utilities or, for example, grocery stores. On the other hand, fast-growing and cyclical companies using P / E ratios can be pretty disorienting for investors.
Fast-growing stocks with P / E ratios greater than 50 or 100are not necessarily expensive if the company's growth rate is capable of providing that value. For companies or industries of this type, it can often be beneficial to use pEG coefficientcomparing the share price with earnings per share and the company's expected future earnings. PEG can be a good value for money when comparing companies within the same sector. PEG is the price that an investor is willing to pay for growth, but this measure is only applicable to companies doing similar activities and demonstrating relatively high growth rates. For example, the P / E ratio is 20 for company A and 15 for company B, but company A is growing at a rate of 15%, and company B is growing at 10%. Which one is more expensive? Does the higher growth rate of Company A offset the higher value of its shares for investors? Using the PEG ratio for both companies, we can quickly calculate that the PEG value for company A is 1.33 (P / E / G \u003d 20/15), while for company B it is 1.5. While Entity A's actual P / E is higher, Entity B is more expensive in terms of growth prospects and has a higher PEG.
However, this indicator will not be a reliable benchmark for companies with low growth rates or low profitability. In addition, the PEG ratio is only comparative in nature, that is, it can only be used to compare similar companies. Also p / E ratios extremely sensitive to sight economic activity and factors specific to the sector and therefore can vary greatly from industry to industry. For example, utilities, with their low growth and high capital expenditure requirements, typically have a ratio below 10. On the other hand, tech companies tend to have multiples of 15-20 profits, simply because the industry has traditionally been faster. growth compared to utilitiesand also uses a much smaller amount of capital to generate profits. Among the most important knowledge about the price / earnings ratio, refers to its use for cyclical stocks, the profit for which changes in strict accordance with the business cycle and reaches a maximum at its peak. With a thriving economy, earnings on cyclical stocks skyrocket, sending P / E down. Therefore, what may seem cheap at first glance, in fact, is not. The opposite is true during periods of recession, when the P / E ratio can be very high or even negative, which prompts investors to regard these stocks as expensive. Low profits simply inflate the P / E by decreasing the denominator. The company seems to be expensive, although in reality it is at the lowest possible levels.
Profit Visibility - Investors don't like unknowns!
Because P / E ratios are calculated based on the company's projected future earnings growth, markedly growing companies tend to have higher P / E and PEG ratios than companies whose growth is less obvious. For example, novo NordiskThe insulin research and insulin-based diabetic drug business is distinguished from its peers in the industry by visually strong margins due to an increase in diabetes cases in the developed world and the size of its market segment. Until diabetes is defeated or Novo Nordisk loses its dominant position in the insulin market, cash flows and the company's profits will be relatively safer compared to some of its competitors in the pharmaceutical industry.
The same way, apple profit has increased by 641% over the past 4 years, but the P / E ratio is only about 15. Investors estimate Apple's profit at such a low value by historical standards, because they have no idea what next genius product the company will invent, and, accordingly, they do not know with what parties to wait for its future profits (low level of visibility).
It's amazing that Facebook, whose profit is not too obvious and depends solely on advertising, could be estimated at around USD 100 billion when released in 2012, with the PE ratio expected to reach around 100. The investor may wonder which is better : Spend $ 100 Billion and Acquire a Stake in Apple, Berkshire Hathaway or Exxon Mobil, or Own Facebook?
Scientific research on the P / E ratio
What lessons should be learned from this P / E analysis? Historically, best profit indicators, on average, showed companies with a lower value of the price / earnings ratio. Why, you ask. Because, in general, investors tend to be over-optimistic about firm growth and expect the fastest growing companies to continue to maintain the same growth rate in the future. Usually this rarely happens due to the laws of competition. On the other hand, investors tend to greatly underestimate the stocks of companies going through a bad year or bad quarter. The result is a simple rule of thumb: winners get too high price ratios, which makes them overvalued, while losers are underestimated for the same reasons. therefore former losers (low P / E) usually outperforms past winners (high P / E stocks).
Price / book value ratio
Although this metric is less commonly used than P / E, it can sometimes arm an investor with valuable information. P / B ratio (the ratio of the market price of a share to its book value book value) even more than P / E is industry-specific and, like P / E, is largely industry-specific. For example, many tech companies have P / B ratios of 10 or more, while bank stocks trade at a ratio in the region of 1. What caused this significant difference? The main difference has to do with the use of capital required in the industry. Tech companies don't need a lot to make a profit material values and physical capital. An excellent illustration of this is Microsoft, which primarily deals with software... In order to generate profits, it first of all needs human capital; this business model is not capital intensive. On the other hand, banks need to raise a large amount of capital: bank deposits, etc. And since assets on the balance sheets of banks are traditionally characterized by relatively high liquidity, such assets can be valued at their real market value. It means that bank balance will be equivalent to the real market value of its assets, or a factor of 1.
One useful way to use the price / book value metric is to use to assess the value of assets on the company's balance sheet... Less liquid assets may be overvalued. During boom periods, book value rarely helps buy-ups in the hunt for good deals. securities at a low rate, since most companies will not participate in transactions if the book value (net assets) ratio is 1. During recessions economic activity or a recession, the P / B is of great value because it helps investors hunt for bargain purchases shares of grossly undervalued companies.
P / B value can go below one in cases with liquid firms (banks, etc.). This usually happens when the market fears that a company's shareholder value will be destroyed. The reason for this may be leverage, which is clearly demonstrated by the current financial crisis... Generally, the more liquid a company's assets are, the closer to 1 its P / B ratio will be, all other things being equal. The more profit a company can generate through its balance sheet assets, the higher the price / book value will be.
In conclusion, I would like to emphasize that there are no evaluation criteria that can reveal or at least try to reveal the whole truth, however, even knowing the main pitfalls can save investors from making mistakes, for which they will have to pay dearly.
The Price / Book Value Ratio (P / B) reflects the value of the company's assets formed by own funds, per share. Indicated as P / BV (Price to Book Value) or P / B (Price to Book). Calculated as:
- Price / Book \u003d Market value of the company / Book value of the assets of the company
The book value of assets is the net assets of the company, that is, assets (Total Assets) minus liabilities (Total Liabilities). Simplified: this is the accounting name for the money that would be left to shareholders after the sale of the company and the repayment of all its debts. Thus, if a company's market capitalization is $ 2 billion and its net assets are $ 1 billion, then P / B \u003d 2.
The advantage of P / B is its stability: it is less than the net profit, depends on ongoing changes economic environment... Investors use it to compare a company's market value with book value to understand how much they pay for a company's net assets per share.
- Promotion with P / B< 1 считается недооцененной; акция с P/B > 5 - expensive.
- If x P / B ≤ 22.5, then according to B. Graham, such a share is fairly priced.
Additionally, P / B gives an indication of whether the investor is paying too much for the balance that he could receive in the event of bankruptcy of the company. If the company is in financial difficulty, the book value is usually calculated without intangible assets (they will not have residual value) and taking into account the dilution of capital, since the right to share options can be transferred upon sale of the company.
In most companies, the balance sheet accounting of fixed assets is carried out according to conservative estimates ( at original cost less depreciation). This partly explains why investors are willing to pay 1.5 to 2 times its book value per share. But, as Peter Lynch warns, “buying stocks based on book value alone is risky and shortsighted. Only the real value matters. ”
In this regard, for a more accurate assessment, you should use P / B in tandem with the return on equity ratio - (Return On Equity), which also uses net assets (ROE is defined as net profit divided by net assets value).
- As ROE grows, so does P / B. Low ROE and high P / B may indicate a stock overvaluation. High ROE and low P / B, on the other hand, indicate that the market underestimates the company's potential.
However, it is important for an investor to remember that the P / B ratio does not reflect the company's ability to generate profit or cash for shareholders. And there is a serious limitation in its use: it is applicable for companies that have tangible assets on their balance sheets ( buildings, land or financial assets ), and is not suitable for evaluating service or technology companies whose main assets are intangible ( patents, licenses, trademarks). Another disadvantage of the P / B multiplier is that the book value of assets is an accounting value, and it is highly dependent on the applied accounting standards.
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