Michael R King COM371 19b Valuation Multiples

Key Takeaways

[Music] this is michael king in the second video on financial statement analysis we're going to look at valuation multiples this is going to be section 4.7 from booth clear and marquita valuation multiples are used by analysts standardize how expensive or how cheap a company's stock is relative to its peers so we're going to be standardizing price by earnings per share maybe by book value per share or we're going to standardize the total enterprise value which is the value of all the assets by ebitda we're looking at a company's own history over time which is the trend however we may also look at in multiples across companies at a given point in time which is called comparable companies or trading multiples of comparable companies all of these multiples are take the same form it's a form of payback how long will it take to recover my price which is a shortcoming because you're only looking at one year of the financial metric either the last 12 months or the next 12 months let's look at apple and how the valuation multiples have changed over time from 2016 15 to 2019. notice that there's a number of inputs we need to have share price shares outstanding we're going to calculate book value per share which is shareholders equity divided by the shares outstanding you're going to look up what their dividends per share earnings per share are and look at how much the dividend is as relative to the share price to get the dividend yield as well as how much of the cash the company is earning do they pay out in the form of dividends which is the payout these multiples that combine a market input which is forward-looking with a financial statement input which is going to be historical or backward looking price earnings multiple relates to share price to earnings per share where earnings per share is simply net income divided by shares outstanding either at the end of the year or you could use the average share as outstanding here we can see that for apple it's gone from a multiple of 11.5 times up to a multiple of 17.6 times you can use either basic or diluted shares outstanding and you will also find people using either backward looking or forward-looking earnings per share when it's backward looking they call it last 12 months or ltm when it's forward-looking you could use next 12 months or an ntm so the ratio itself is simply the share price divided by earnings per share and if you multiply the top and the bottom by number of shares outstanding you can see that it simply becomes the market capitalization of the company divided by its net income another metric is the market to book ratio also called the price to book price to book is related to the book value per share which is an accounting measure it's simply the common equity of the of the firm on its balance sheet at your end divided by the number of common shares outstanding you can see that common equity is not the market value it is the book value and that it would include all the different categories shown on the balance sheet which could be any of these common stock paid capital retained earnings or treasury stock all you do is you take the share price divided by the book value for one share or if you multiply the top and the bottom by number shares outstanding you could take the market capitalization and divide it by common equity notice that the price to book for apple has gone from 5.2 times up to 10.7 times showing that it has been increasing steadily the other multiple we look at is enterprise value to ebitda where enterprise value is simply the market value of the assets to find the market value of the assets we're going to have to use this calculation here it's going to be market value of equity plus the market value of debt plus the market value preferred shares you're going to add non-controlling interest and you're going to subtract any excess cash to get enterprise value which may be called total enterprise value or teb and what we're going to do is we're going to relate this value of the all the assets to the cash flow symmetric cash flow generated by the assets we're going to use a financial analyst measure called ebitda which is not an accounting measure where ebitda stands for earnings before interest taxes depreciation and amortization this is a shortcut for free cash flow but notice it does not take into account capital expenditures which are a use of cash you can see here that the evident multiple for apple has gone from 5.7 times up to 11.4 times and you can see the trend is upward over time that's it thanks for your time [Music]