EV/S and P/E

CFA Level II Equities
#1

Hi, I have three separate questions

  • Please explain why do we look at Operating profit margins to determine the reason behind the peer-based companies having different EV/S multiples.
  • Also why do we multiply P/E with EPS to find terminal value.
  • When given Balance sheet and Cash flow statement why do we take the Change in Working capital, Change in Fixed Investment and debt borrowing from cash flow statement and not from balance sheet

Thanks

#2

EV indirectly captures profitability (as the many measures it could be, included operating profit margins), so different EV/S for related peers should be explained by the different capability of company’s assets to generate profits. A very good indicator (as long as it is well calculated and adjusted) is operating profit margin.

P is price per share. So, in order to calculate P/E, we need to calculate Earnings per Share. Yup, that E in P/E is EPS itself.

However, be careful what P/E you are calculating / looking at… trailing or expected?

If I want to calculate terminal value on year 3 in the future, I need the expected P/E in 3 years. So, P/E x EPS x number of shares I would have the terminal value ($ amount) of equity in year 3.

You can from both lol, however, if you are already given with the numbers from the Cash Flow Statement, so hurra!

Remember that BS numbers are net numbers most of the time.

For example: Fixed assets shown in BS are net of accumulated depreciation. If you want to know the fixed asset investment within a certain period, you will need the depreciation expense (Income Statement data) incurred in that period, and beginning and ending value of fixed assets. It could be somewhat complicated to calculate. Impossible if data missing.

#3

2nd question … .P/E = Price per Earnings

EPS = Earnings Per Share

So P/E * EPS = Price per Earnings * Earnings Per Share = Price / Share.

And this is the Terminal Price.

you asked this same question a few days ago as well … [if I recall right]

============

3rd Question: Balance sheet is a cumulative number - across multiple periods.

Cash Flow statement is a single period statement

given 2 consecutive periods - changes are easier to read from there.

=================

1st question -