Читать книгу Entrepreneurial Finance - Robert D. Hisrich - Страница 57

If the firm has equity that is publicly traded, one can use market ratios to get an indication of how the market values the firm versus peers (cross-sectional) or relative to its own historical performance (time-series). Because the price of equity is determined by market supply and demand forces, management can be evaluated on how the market views their performance; market value ratios give management an idea of what the firm's investors think of the firm's performance and future prospects. The most common market ratio is the price to earnings (P/E) ratio, calculated as

Note: Old Pueblo Lithographers does not trade in the public market; therefore, no examples of market ratios are available to use as examples.

The ratio specifies how much the market is willing to pay for $1 of the company's earnings. Earnings are a chief driver of investment value, and a higher P/E ratio versus its peers indicates that the market is confident in the firm's ability to generate future earnings. The P/E ratio can be calculated based on the firm's last 12 months’ EPS (trailing P/E) or on the next 12 months’ expected EPS (forward P/E).

The P/E ratio has some drawbacks that derive from the characteristics of EPS. First, EPS can be negative, and the P/E ratio does not make economic sense in that case. Second, the EPS calculation may have large transient components that do not adequately reflect the ongoing operations of the firm. Finally, managers have flexibility in the application of accounting standards used in calculating earnings. In making such choices, managers may distort EPS as an accurate reflection of economic performance. All these factors may affect the comparability of P/Es among companies.

Certain types of privately held companies, including companies organized in partnership form, have long been valued by a multiple of annual sales. The price to sales (P/S) ratio is calculated as

where Sales per Share = Annual Sales/Shares outstanding.

The P/S market valuation alleviates some of the concerns that are present in the P/E ratio. For example, sales are generally less subject to distortion or manipulation than are EPS. Also, as long as the company has begun selling its products or services, the sales figure will always be positive even though EPS can be negative. This point, however, is also a drawback of the P/S ratio, as companies can have sales but consistently post negative earnings. A final reason is that sales are generally more stable than EPS, which reflects operating and financial leverage, and is therefore more meaningful for the firm's economic performance.

The price to book value ratio (P/BV) is also a popular measure of market value. The book value represents the investment that common shareholders have made in the company. The P/BV ratio is

where Book Value per Share (BVPS) = Shareholders’ Equity/Common stock shares outstanding.

Because the purpose of this ratio is to value common stock, any value attributable to preferred stock must be subtracted from shareholders’ equity. Like the P/S ratio, the P/BV can be used even if EPS are negative. Book value is also more stable and can be used if EPS are abnormally high or low.

Numerous other market valuation measures can be calculated, including price to cash flow (P/CF) and enterprise value to EBITDA (EV/EBITDA). The purpose here is not to list them all but rather give an overview and demonstrate how market ratios can be used to gauge how the market values the company. By comparing these ratios against peer companies or historical firm measures, management can get a sense of whether the market agrees on the firm's trajectory.