EARNINGS MULTIPLES Earnings multiples remain the most commonly used measures of relative value. In 此下载文件来自于企业管理资源网 www.3722. (大量管理资料下载) this chapter, we begin with a detailed examination of the price earnings ratio and then move on to consider variants of the multiple – the PEG ratio and relative PE. We will also look at value multiples and, in particular, the value to EBITDA multiple in the second part of the chapter. We will use the four-step process described in Chapter 17 to look at each of these multiples. Price Earnings Ratio (PE) The price-earnings multiple (PE) is the most widely used and misused of all multiples. Its simplicity makes it an attractive choice in applications ranging from pricing initial public offerings to making judgments on relative value, but its relationship to a firm's financial fundamentals is often ignored, leading to significant errors in applications. This chapter provides some insight into the determinants of price-earnings ratios and how best to use them in valuation. Definitions of PE ratio The price earnings ratio is the ratio of the market price per share to the earnings per share. share per Earnings share per Price Market PE = The PE ratio is consistently defined, with the numerator being the value of equity per share and the denominator measuring earnings per share, both of which is a measure of equity earnings. The biggest problem with PE ratios is the variations on earnings per share used in computing the multiple. In Chapter 17, we saw that PE ratios could be computed using current earnings per share, trailing earnings per share, forward earnings per share, fully diluted earnings per share and primary earnings per share. Especially with high growth firms, the PE ratio can be very different depending upon which measure of earnings per share is used. This can be explained by two factors. · The high growth in earnings per share at these firms: Forward earnings per share can be substantially higher (or lower) than trailing earnings per share, which, in turn, can be significantly different from current earnings per share. · Management Options: Since high growth firms tend to have far more employee options outstanding, relative to the number of shares, the differences between diluted and primary earnings per share tend to be large. When the PE ratios of firms are compared, it is difficult to ensure that the earnings per share are uniformly estimated across the firms for the following reasons. · Firms often grow by acquiring other firms and they do not account for with acquisitions the same way. Some do only stock-based acquisitions and use only pooling, others use a mixture of pooling and purchase accounting, still others use purchase accounting and write of all or a portion of the goodwill as in-process R&D. These different approaches lead to different measures of earnings per share and different PE ratios. · Using diluted earnings per share in estimating PE ratios might bring the shares that are covered by management options into the multiple, but they treat options that are deep in-the-money or only slightly in-the-money as equivalent. · Firm often have discretion in whether they expense or capitalize items, at least for reporting purposes. The expensing of a capital expense gives firms a way of shifting earnings from period to period and penalizes those firms that are reinvesting more. For instance, technology firms that account for acquisitions with pooling and do not invest in R&D can have much lower PE ratios than technology firms that use purchase accounting in acquisitions and invest substantial amounts in R&D. Cross Sectional Distribution of PE ratios A critical step in using PE ratios is to understand how the cr