Transcript D/P ratio
E-I-C ANALYSIS BY CA AMIT SINGHAL MACROECONOMIC ANALYSIS • • • • • • • • • • Growth rate of GDP Industrial growth rate Agriculture and monsoons Savings and investment Government budget and deficit Price level and inflation Interest rates Balance of payments and exchange rates Infrastructural facilities and arrangements Sentiments INDUSTRY ANALYSIS INDUSTRY LIFE CYCLE ANALYSIS • Pioneering stage • Rapid growth stage • Maturity and stabilisation stage • Decline stage STRUCTURE AND CHARACTERISTICS • Attitude of govt. towards an industry • Expected rate of growth • Control over prices of inputs and outputs • Past sales and earnings performance • Cost structure: fixed and variable costs (BEP) • Labour conditions • Industry share prices relative to industry earnings COMPANY ANALYSIS • • • • • • • • Return on equity (ROE) Analysis of ROE in five factors Book value per share EPS Dividend payout ratio Growth performance (CAGR) Sustainable growth rate Risk measures - beta ESTIMATION OF INTRINSIC VALUE Three steps are involved: • Estimate the expected earnings per share • Establish a PE ratio • Develop a value anchor and a value range Estimate expected EPS REFER TO MINI CASE-1 Establish a PE Ratio Different PE ratios can be calculated for the same stock at any given point in time: • PE ratio based on last year’s reported earnings • PE ratio based on trailing 12 months earnings • PE ratio based on current year’s expected earnings Deriving a PE ratio PE ratio may be derived from: • Constant growth dividend model • Cross-section analysis • Historical analysis Constant growth dividend model PE ratio = D/P ratio r–g r= required return on equity g= expected growth rate in dividends Cross section analysis PE is regressed on several fundamental variables like • PE = a1 + a2 growth rate in earnings + a3 dividend payout ratio + a4 variability of earnings + a5 company size Historical analysis • A simple average of prospective PE ratios of past some years may be considered as applicable in the immediate future as well. Weighted PE ratio • The PE ratios estimated by the preceding three methods can be averaged to arrive at the justified PE ratio for the company under consideration. VALUE ANCHOR AND VALUE RANGE • Value anchor= Projected EPS * Appropriate PE ratio • Defining a range takes care of bias and error in the estimation process.