Similar to a stock market series, a company's expected earnings per share (EPS) can be determined as follows:

Formula 13.10

EPSstock market series= [(sales)(operating margin) - depreciation - interest] x (1-tax)

Where:
Sales = sales per share of the estimated series determined through regression
OM = the operating margin is typically calculated as a percentage of sales
Depreciation = this is determined by either continuing the trend of the current depreciation or focusing on the expected capital expenditures and how that number relates to future dividends.
Interest = interest is determined by outstanding debt and the interest rate on that debt.

The inputs, however, are determined from specific company data.

Example: Calculate the EPS of a company
Assuming the following estimates for a company, sales per share = $50.00, OM = 20%, depreciation of $5.00, interest of $1.00 and a corporate tax rate of 40%, calculate the forecasted EPS of the company?

Answer:
EPS = [($50.00)(20%) - $5.00 - $1.00](1-0.40) = $2.40 per share

Determining the Earnings Multiplier of a Company
Similar to a stock market series, a company's earnings multiplier can be determined as follows:

The price of the stock is simply divided by the earnings per share of the stock as follows:

Formula 13.9 (restated)

Earnings multiplier

Example: Determining a company's earnings multiplier
With Newco's $0.25 dividend payout, an EPS of $1.00, calculate the stock's P/E ratio assuming 10% required return and 5% growth.

Answer:
P/E ratio = 0.25/1.00 = 5%
(0.10-0.05)



Life Cycle Analysis: The Business Cycle

Related Articles
  1. Investing

    What's A Company’s Worth, And Who Determines Its Stock Price?

    A company’s worth is the same as its market capitalization. Market capitalization is stock price multiplied by number of outstanding shares.
  2. Investing

    PEG Ratio

    Learn more about how this ratio is used to determine a stock's value based on its earnings growth.
  3. Investing

    How To Find P/E And PEG Ratios

    If these numbers have you in the dark, these easy calculations should help light the way.
  4. Investing

    Everything Investors Need To Know About Earnings

    We go over the concepts behind the excitement over the most important figure in the stock market.
  5. Investing

    Beware False Signals From The P/E Ratio

    The P/E ratio is a simple tool for evaluating a company, but no one ratio can tell the whole story.
  6. Investing

    How To Make A Winning Long-Term Stock Pick

    Discover the key elements of a good long-term investment and how to find them.
  7. Investing

    The Most Important Metrics For Earnings Season

    Knowing how to read an earnings report can help investors decide which stocks to buy.
  8. Investing

    The 5 Types Of Earnings Per Share

    A look at the five varieties of EPS and what each represents can help an investor determine whether a company is a good value, or not.
  9. Investing

    The Three Things Most Good Stocks Have In Common

    Uncover the three things most good stocks have in common: performance, profitability and value.
Frequently Asked Questions
  1. Why is social responsibility important to a business?

    Take social responsibility seriously, and your business could benefit from happier, more productive staff members while helping ...
  2. Which socially responsible retailers appeal most to ethical investors?

    Learn why ethical investors have many options in the retail sector, and discover which retail companies are most popular ...
  3. What are Some Examples of Free Market Economies?

    Learn which of the world's economies best resemble free market economies, marked by free trade, low government involvement, ...
  4. Who Decides When to Print money in India?

    Find out the role of the Reserve Bank of India, or RBI, and the amount of authority given to the government. Learn who is ...
Trading Center