What's the difference between a great company and a great stock?

The price paid for a company is just as important as the quality of the company.

Rule of Thumb:

PE above 11: Market expects positive growth

PE at 11: Market expects zero growth

PE below 11: Market expects negative growth

Dutch Lady: How do you value this stock?

Dutch Lady

FYE 31st Dec Qtr  Year Revenue Earnings  EPS Div NAV ttm-EPS ROE Q4 2011 211.404 28.37 44.33 37.5 4.05 168.88 41.70% Q3 2011 201.708 23.6 36.87 35 3.98 141.48 35.55% Q2 2011 200.892 27.775 43.4 0 3.61 125.43 34.75% Q1 2011 196.643 28.338 44.28 0 3.53 111.59 31.61% Q4 2010 156.768 10.835 16.93 37.5 3.09 99.83 32.31% Q3 2010 183.619 13.822 20.82 35 3.27 107.98 33.02% Q2 2010 185.784 18.918 29.56 0 3.07 118.74 38.68% Q1 2010 170.454 20.812 32.52 0 3.14 113.23 36.06% Q4 2009 169.521 16.048 25.08 57.19 2.81 94.39 33.59% Q3 2009 177.129 20.21 31.58 8.44 Q2 2009 176.631 15.389 24.05 0 Q1 2009 168.566 8.753 13.68 0

Dutch Lady	31/12/2011	31/12/2010	Absolute Chg	Change
Revenue	810.65	696.63	114.02	16.37%
Gross Profit	304.47	248.664	55.81	22.44%
Operating Profit	139.372	89.221	50.15	56.21%
Financing costs	-0.919	0	-0.92	#DIV/0!
PBT	141.553	90.104	51.45	57.10%
PAT	108.082	63.887	44.20	69.18%
EPS (basic) sen	168.88	99.82	69.06	69.18%
NCA	74.048	73.246	0.80	1.09%
CA	324.465	234.244	90.22	38.52%
Total Assets	398.513	307.49	91.02	29.60%
Total Equity	259.154	197.472	61.68	31.24%
NCL	4.051	3.757	0.29	7.83%
CL	135.308	106.261	29.05	27.34%
Total Liabilities	139.359	110.018	29.34	26.67%
Total Eq + Liab	398.513	307.49	91.02	29.60%
Net assets per share	4.05	3.09	0.96	31.07%
Cash & Eq	193.143	85.657	107.49	125.48%
LT Borrowings	0	0	0.00	#DIV/0!
ST Borrowings	0	0	0.00	#DIV/0!
Net Cash	193.143	85.657	107.49	125.48%
Inventories	93.448	72.722	20.73	28.50%
Trade receivables	36.713	75.176	-38.46	-51.16%
Trade payables	121.831	99.638	22.19	22.27%
Current Ratio	2.40	2.20	0.19	8.78%
PBT	141.553	90.104	51.45	57.10%
OPBCWC			0.00	#DIV/0!
Cash from Operations	188.290	123.391	64.90	52.60%
Net CFO	161.940	98.389	63.55	64.59%
CFI	-7.135	-8.064	0.93	-11.52%
CFF	-47.319	-46.400	-0.92	1.98%
Capex	-10.882	-9.089	-1.79	19.73%
FCF	151.058	89.300	61.76	69.16%
Dividends paid	-46.400	-46.400	0.00	0.00%
DPS (sen)	72.5	72.5	0.00	0.00%
No of ord shares (m)	64	64	0.00	0.00%
Financial Ratios
Net Profit Margin	13.33%	9.17%	0.04	45.38%
Asset Turnover	2.03	2.27	-0.23	-10.21%
Financial Leverage	1.54	1.56	-0.02	-1.24%
ROA	27.12%	20.78%	0.06	30.54%
ROC	163.73%	57.14%	1.07	186.57%
ROE	41.71%	32.35%	0.09	28.91%
Valuation	5.3.2012	5.3.2011
Price	29.5	17.38	12.12	69.74%
Market cap (m)	1888.00	1112.32	775.68	69.74%
P/E	17.47	17.41	0.06	0.33%
P/BV	7.29	5.63	1.65	29.34%
P/FCF	12.50	12.46	0.04	0.34%
P/Div	40.69	23.97	16.72	69.74%
DPO ratio	0.43	0.73	-0.30	-40.89%
EY	5.72%	5.74%	0.00	-0.33%
FCF/P	8.00%	8.03%	0.00	-0.34%
DY	2.46%	4.17%	-0.02	-41.08%

The price of Dutch Lady was RM 29.50 on 5.3.2012.  Its price a year ago, on 5.3.2011 was RM 17.38.  However, look at their  PEs.  Today, Dutch Lady is trading at PE of 17.47 while it was trading at PE of 17.41 a year ago.  :-)

Payback Period = Double Your Money

A payback period is the amount of time it takes for a company to accumulate enough in earnings to equal the amount of your original investment. 

That sounds complicated, but in simple terms, it is the time it would take you to double your money based on the profits a company is generating. 

There are a couple of payback periods to consider, and one of the simplest can be determined by looking at the stock's P/E, or the ratio of its price to its earnings per share. 

P/E is one way you can estimate how many years it would take for the company to accumulate earnings equal to its share price. 

• Imagine a $10 stock with $1 per share in earnings. 
• Based on its P/E of 10 ($10/$1), if the company continues to earn $1 per share every year, it would take 10 years for all those dollars to add up to the original $10 stock price. 
• So a stock with a P/E of 10 has a payback period of 10 years, assuming its earnings are the same each year.

But most companies don't make the same earnings year after year. As an investor, you're hoping the earnings will grow. 

To account for growth, there is something called the PEG payback period, which is based on the price/earnings growth (or PEG) ratio. 

The PEG ratio relates a company's price/earnings ratio (P/E) to its earnings growth. 

It is calculated by dividing a stock's forward P/E, or its P/E based on consensus analyst earnings estimates (what Wall Street analysts expect the company to earn over the next 12 months), by its forecasted earnings-growth rate (the rate at which analysts expect the company to grow).

PEG ratio = forward P/E / expected growth rate

Like P/E, the PEG ratio tells you how many years it will take for earnings to equal the stock price. But unlike P/E, it assumes earnings will grow at a certain rate.

Take our $10 stock with $1 per share in earnings. 

• If analysts' consensus estimates say the company will grow at a rate of 10%, we would increase each year's earnings by 10% before adding it up. 
• Therefore, the first year's earnings would be $1.10 (that's $1 times 1.1), the second year's would be $1.21 ($1.10 times 1.1), and so on. 
• Based on a 10% growth rate, it would take seven years before earnings added up to the original stock price. 

As you can see, the PEG payback period for any growing company will be shorter than the P/E payback period.

PEG and Payback Periods

If you own a home or a car, you are probably all too familiar with what happens when you take out a loan.

• A bank lends you a certain amount of money that you must pay back at a specified rate, such as one payment per month for five to 30 years. 
• In exchange for taking a risk that you won't repay the loan, the bank earns some revenue on top of its investment, based on the interest rate it charges.

 As a shareholder in a company, you're a lot like a bank. 

• When you buy stock, you're in essence lending a company your money so it can buy what it needs for its business and (hopefully) grow. 
• You get paid back as the company's earnings grow and its stock appreciates. 

But whereas a bank clearly establishes its profit margin and a timetable for being repaid, shareholders aren't that lucky. (It's a different story for bondholders, who literally loan the company money and do get scheduled interest payments.) 

It is possible, however, to estimate what you may earn on your investment and when you'll earn it by examining a stock's payback period. 

Valuing Stocks - Relative Valuation

There are two basic methods of valuing stocks:

• Relative valuation
• Absolute valuation or Intrinsic Valuation

The most frequently used method is relative valuation, which compares a stock's valuation with those of other stocks or with the company's own historical valuations.  

For example, if you were considering the relative valuation for a chemical company CC, you would compare its stock's price/earnings ratio (or its price/sales ratio, etc.) with that of other chemicals makers or with that of the overall stock market.  

• If CC has a P/E ratio of 16 and the average for the industry is closer to, say 25, CC's shares are cheap on a relative basis.  
• You can also compare CC's P/E with the average P/E of an index, such as the S&P 500,  to see whether CC still looked cheap.  

The problem with relative valuations is that not all companies are made alike - not even all chemicals makers.

There could be very good reasons why CC has a lower P/E than its average peer.  

• Maybe the company doesn't have the growth prospects of other chemicals companies.  
• Maybe the possible liability from a product litigation rightly puts a damper on the stock's price.  

After all, a Hyundai has a lower sticker price than a Mercedes, but for very good reasons.

The key is to research your stocks well and be aware of the factors that might justifiably make them cheaper or more expensive than similar stocks.

Secrets of the share race

November 20, 2011

IT'S the only race where you can back the winner after it's started, place a new bet in the middle of it or quit losers well before the finish.

That's why Geoff Wilson, one of Australia's best fund managers, loves the sharemarket, though it's a marvel that so many still lose their shirts.

The portfolio of his listed investment company WAM Capital has returned more than 20 per cent a year since it started 13 years ago.

Now we have the inside dope from Matthew Kidman, Wilson's former right-hand man turned financial author. Wilson's racing analogy is in his book Bulls, Bears and a Croupier (published by Wiley, $34.95), which lets us in on the secrets.

One is that they get it wrong half the time.

Kidman says the trick is to cut your losses quickly - if a stock drops 10 per cent ''from the average cost of purchase'' it's sold - though there's no denying the ones they get right must be something else.

The truth is you can be right but wrong at the same time. Or to be more exact, have the right idea but get your timing wrong.

''It doesn't always pay to be right,'' he writes.

Nor does it pay to stay.

''I have come to the conclusion that most companies listed on the sharemarket are rubbish - they just have good periods,'' he writes.

Although blue-chip stocks ''have some fabulous periods'' these are invariably ''followed by long and unexplained lean periods''.

So Kidman says treat the market like a game of snakes and ladders. ''Your job is to jump from ladder to ladder.''

A reader will be struck by how many contacts a professional fund manager has - getting tips from brokers first hand and a foot in the door of chief executive's offices - yet Kidman says it is ordinary investors who have the advantage.

They can be more fleet-footed, can move in and out of cash and can deviate as much as they like from any sharemarket index.

But where to start?

''If I was to select a single financial indicator,'' Kidman says, it would be ''the earnings forecast for the year ahead, simply because the rest of the market is so sensitive to it''.

In fact, he argues ''an investor should never buy shares if a company has recently downgraded its earnings forecasts by more than 10 per cent''.

The other figure to watch is the price-earnings (P/E) ratio, which you can get off the sharemarket list or a broking website.

This tells you whether a stock is cheap (the lower the better) or not, though it's not infallible.

Usually used to compare stocks, for Kidman P/Es are more useful against themselves.

A stock's historic P/E will tell you whether it's a bargain or not. A sudden spike suggests it's on a roll that won't last.

Perversely, cyclical stocks - those that move most closely with household spending such as retailers - will often have a high P/E in bad times and low P/E in good times.

The reason is that when they're at their peak, the market anticipates a correction coming, so marks them down.

Another insight into market logic is the way that analysts can be unanimously wrong about a stock (think ABC Learning Centres).

''Stockbrokers will place price targets for the stock near the current share-price level and when the P/E ratio goes from, say, 10 to a head spinning 20, the analysts will generally follow with their valuations of the business.''

And so everybody gets sucked into the vortex.

But in the end it's the quality of management that makes the difference and it's a hard call.

Don't think chief executives with a decent shareholding will have the same interests as you, either. They have their own agenda and, in any case, are also responsible for employees and customers.

And don't be your own worst enemy by being subjective about your stocks.

Kidman says: ''View your portfolio as if you had inherited it from someone else.''



Read more: http://www.brisbanetimes.com.au/money/secrets-of-the-share-race-20111119-1no0a.html#ixzz1f5du25h5

Don't be a stockpicking monkey, mistaking skill for luck. Learn DCF and PER 101.

Don't be a stockpicking monkey
Greg Hoffman
March 21, 2011 - 12:06PM

Monkeys are great stockpickers. Had your common-or-garden variety primate randomly selected five stocks in March 2009, chances are it would now be sitting on huge capital gains, contemplating reinvesting them in bananas - by the truckload.

It's easy enough for us to see that our monkey, who now sees himself as a future fund manager, is mistaking skill for luck. What's harder for us to see is how we might be making the same mistake ourselves.

If examining your portfolio's returns over the past few years engenders in you a feeling of self-satisfaction, you're running that risk. With the sharemarket falling recently now is the time to educate yourself. Consider what follows a lesson in fire safety.


Value investing is theoretically simple: buy assets for less than they're worth and sell when they approach or move beyond fair value. So too are valuing assets: discount future cash flows back to today at an appropriate interest rate for the life of the asset. The discounted cash flow (DCF) model is a commonly-used tool, hammered into every finance and business student.

But DCF models quickly deteriorate when they meet a rapidly changing world. The fact that most analysts failed to consider the impact of falling US house prices on their models played a major role in triggering the global financial crisis. Worse still, the misleading precision imbues investors with unwarranted overconfidence. Too often, models are precisely wrong.

Other tools are available to help you avoid this error. The price-to-earnings ratio (PER) is a regularly used proxy for stock valuation but also one of the most overused and abused metrics. To make use of it you need to know when to use it and when not to.

PER 101

The PER compares the current price of a stock with the prior year's (historical) or the current year's (forecast) earnings per share (EPS). Usually the prior year's EPS is used, but be sure to check first.

Last financial year, XYZ Ltd made $8 million in net profit (or earnings). The company has 1 million shares outstanding, so it achieved earnings per share (EPS) of $8.00 ($8 million profit divided by 1 million shares). In the current year, XYZ is expected to earn $10 million; a forecast EPS of $10.00.

At the current share price of $100, the stock is therefore trading on a historic PER of 12.5 ($100/$8). Using the forecast for current year's earnings, the forward or “forecast PER” is 10 ($100/$10).

It's often said that the PER is an estimate of the number of years it'll take investors to recoup their money. Unless all profits are paid out as dividends, something that rarely persists in real life, this is incorrect.

So ignore what you might read in simplistic articles and note this down: a PER is a reflection not of what you earn from a stock, but “what investors as a group are prepared to pay for the earnings of a company”.

All things being equal, the lower the PER, the better. But the list of caveats is long and vital to understand if you're to make full use of this metric.

Quality usually comes with a price to match. It costs more, for example, to buy handcrafted leather goods from France than it does a cheap substitute from China. Stocks are no different: high quality businesses generally, and rightfully, trade on higher PERs than poorer quality businesses.

Value investors love a bargain. Indeed, they're defined by this quality. But whilst a low PER for a quality business can indicate value, it doesn't alone guarantee it. Because PERs are only a shortcut for valuation, further research is mandatory.

Likewise, a high PER doesn't ensure that a stock is expensive. A company with strong future earnings growth may justify a high PER, and may even be a bargain. A stock with temporarily depressed profits, especially if caused by a one-off event, may justifiably trade at a high PER. But for a poor quality business with little prospects for growth, a high PER is likely to be undeserved.

Common trap

There's another trap: PERs are often calculated using reported profit, especially in newspapers or on financial websites. But one-off events often distort headline profit numbers and therefore the PER. Using underlying, or “normalised”, earnings in your PER calculation is likely to give a truer picture of a stock's value.

That begs the question; what is a normal level of earnings? That's the $64 million dollar question. If you don't know how to calculate these figures for the stocks in your portfolio, now is the time to establish whether it's skill or luck that's driving your returns. And if you don't know that, history may well make a monkey of you.



Greg Hoffman is research director of The Intelligent Investor.

http://www.brisbanetimes.com.au/business/dont-be-a-stockpicking-monkey-20110321-1c32p.html

Comparing P/E ratios to growth rates can be significantly more useful than simply comparing two companies' P/E ratios. Why?

Let's compare Company A to its competitor in the same industry Company B to illustrate.

Company A

Price $10

Last year's EPS $1.16

Projected EPS  $1.33


Company B

Price $ 8

Last year's EPS  $1.14

Projected EPS  $1.14


Using the data above, you can see that Company A's trailing P/E is 8.6, while Company B's is just 7.

Why would you want to pay $10 for Company A's earnings when you can get Company B's - the same amount, no less  - for $2 off?  (You could even take the $2 to give yourself a treat. )  :-)

Which company would you buy - Company A or Company B?  Why?

Answer:  Click here.

How much should you pay for a business? Valuing a company (3)

Multipliers

Another simple approach is to use a multiplier to calculate a company's value. These multipliers will vary for different industries. One way of deciding what figure to pick for a multiplier is to analyse previous company takeovers within that sector, examining what was paid for these businesses compared to their sales or profit levels.

Caution must be taken in ensuring that the level of sales or profits in the accounting period being analysed is sustainable and does not contain one-off or abnormal conditions.

Sales multiplier

The sales multiplier uses a multiple of sales to assign a value to that company.

• This could be less than or greater than 1, depending on expectations for future growth. 
• Sales multipliers are particularly popular in start-up companies that are not yet profitable (eg. dot.com companies).

Profit multiplier
In the case of the profit multiplier, the multiplier used tends to be greater than 1 and will be based on 

• how many years' future profit are to be factored into the value of a business as well as 
• expectations for future profit growth.

So if a profit multiplier is 10 was used you might expect a 10% return for the next 10 years, with no change in business conditions to pay for this investment.

Also read:

Valuing a company (1)

Valuing a company using Asset Value (2)

Valuing a company using Multipliers (3)

Valuing a company using Market Capitalisation (4)

Valuing a company using Non-Financial Measures & Balanced Scoreboard (5)

Valuing a company using Cash Flows (6)

PEG Ratio: Why It’s More Relevant than P/E for Stocks

by DARWIN on APRIL 6, 2010

While many individual investors are familiar with the conventional Price to Earnings (P/E) ratio, the PEG ratio isn’t cited nearly as often but it really puts a stock’s valuation in the proper context.  While a P/E ratio will tell you whether a stock is “highly priced” just based on a forward earnings expectations or trailing earnings reports, a PEG ratio is the P/E ratio divided by the stock’s long term annual growth rate.  Now, the problem is estimating just what that growth rate will be.  But for relatively mature companies with transparent investor updates, it’s not too tough to reasonably discern whether you’re in the right ballpark.

PEG Ratio vs. P/E Ratio:

Consider two stocks.

1) Mature industrial company with steady earnings year over year.  P/E = 10.
2) Nimble, fast growing company. P/E = 45.

Let’s say the broad market is trading at an aggregate Price to Earnings ratio of 12.  One investor may view stock 1 as a “value” and stock 2 as being absurdly overpriced.  However, when looking at each in terms of their projected growth rate, the pendulum swings the other way.  If stock 1  is a utility that’s expected to grow at about 5% per year and stock 2 is growing at 30% per year, in the context of future growth, the PEG ratios tell a different story:

1) Stock 1 PEG ratio = 10/5 = 2
2) Stock 2 PEG ratio = 50/25 = 1.5

Stock 2 now appears to be much more of a value.  Often times, stocks with high growth rates are more volatile and prone to massive price swings.  But if you’re able to hang on to a stock for a few years and the projected growth rate assumptions are reasonable, you’re often rewarded with a higher net return.  This is broadly reflected in the long term outperformance of tech stocks, biotech stocks, small caps and emerging market stocks vs. their counterparts.

When I provided my last portfolio update you will have noticed that many holdings fall into the stock 2 bucket since I’m young and have a long time horizon and my ultimate goal is to maximize investment returns.  Conversely, when I’m 55 and approaching retirement, I will likely be more focused on stability and income via high yield investments.  So, there’s no “right” way to invest, but it’s important to consider the context of your investments as well as your time horizon.

Do You Use the PEG Ratio in Evaluating Stock Purchases?

http://www.darwinsfinance.com/peg-ratio/

Financial Statements and the Investors

Interpretation and Analysis of Financial Statements for the Investors

The investor has to identify changes and trends in the financial statements to help explain some fundamental questiona and raise supplementary questions. For example:

Turnover: Is it Increasing?

If Yes:

• Is there a corresponding increase in Profits?
• Is there an additional investment in Fixed Assets?
• How is the additional investment Financed?

Investors derive their information from published sources such as annual reports, daily newspaper and magazines. Information contained in the annual reports is outdated, and is useful only for forecasting for the future plans and development. Information in newspapers and magazines may be more current and relevant for evaluating investments, but nonetheless still historical information.

Investors vary in their preferences. Some prefer high dividend pay-out rates and otheres prefer high capital gains: yet others may invest to gain control. Investors have to first establish their preferences.

A fundamental technique used to determine the share price is to study the dividend pay-out trend of the company. Investors who prefer a high dividend pay-out rather than capital appreciation should analyse the dividend policy of the company to decide whether to invest in, hold on to or dispose of, shares. Such investors should use dividend cover and dividend yield ratios to analyse the business. Companies with high ratios are preferred to those with low ratios.

Those who prefer capital appreciation to high dividends should study the PE ratio. The PE ratio relates the current price to the latest earnings per share. The PE ratio published daily in the newspapers compares the current market price of the share to the previous year's earnings per share.

The PE ratio represents the market's perception of a company's future performance in relation to its growth, gearing, risks and dividend policy.

• The value of PE ratio depends on the stock market environment and the industry a company is in.
• The average PE ratio varies from industry to industry. A careful study of the industry average gives an indication of the performance of the company in question.
• Shares with a PE ratio higher than industry averages are generally attractive to investors.

A high PE ratio of a particular share could imply that the company concerned has a high growth potential and is a leader in the industry. Alternatively the shares may just be overvalued. By contrast, a low PE ratio may indicate poor performance or undervalued shares.

Reference: How to Read Financial Statements by Jane Lazar

Is the Stock Market Cheap?

In times of critical importance, the conventional P/E ratio often lags the index to the point of being useless as a value indicator. "Why the lag?" you may wonder. "How can the P/E be at a record high after the price has fallen so far?" The explanation is simple. Earnings fell faster than price. In fact, the negative earnings of Q4 is something that has never happened before in the history of the S&P Composite.

The P/E10 Ratio

Legendary economist and value investor Benjamin Graham noticed the same bizarre P/E behavior during the Roaring Twenties and subsequent market crash. Graham collaborated with David Dodd to devise a more accurate way to calculate the market's value, which they discussed in their 1934 classic book, Security Analysis. They attributed the illogical P/E ratios to temporary and sometimes extreme fluctuations in the business cycle. Their solution was to divide the price by the 10-year average of earnings, which we'll call the P/E10. In recent years, Yale professor Robert Shiller, the author of Irrational Exuberance, has reintroduced the P/E10 to a wider audience of investors.

Is the Stock Market Cheap?



April 3, 2009 revised April 6th


An old-fashioned way to answer this question is to look at the historic Price-to-Earnings (P/E) ratio using reported earnings (as opposed to earnings estimates).


The "price" part of the P/E calculation is available in real time on TV and the Internet. The "earnings" part, however, is more difficult to find. The authoritative source is the Standard & Poor's website, where the latest earnings are posted on the earnings page in a linked Excel file (see column D). More...

Establishing a PE Ratio

The PE ratio maybe derived from the

1. constant growth dividend model, or
2. cross-section analysis, or
3. historical analysis.

Constant Growth Dividend Model.

We derive the PE ratio for a constant growth firm from the constant growth dividend discount model.

PE Ratio
= Dividend payout ratio/ (Required return on equity - Expected growth rate in dividends)

Dividend Payout Ratio: Most companies treat their dividend commitment seriously. Consequently, once dividends are set at a certain level, they are not reduced unless there is no alternative. Further, dividends are not increased unless it is clear that a higher level of dividends can be sustained. Thanks to these policies, dividends adjust with a lag to earnings.
If the dividend payout ratio increases the above ratio increases, which has a favourable effect ont he price-earnings multiple. However, an increasein the dividend payout ratio has the effect of lowering the expected growth rate of dividends int he denomination of the above ratio which leads to a decrease in the price-earnings multiple. On the whole, in most cases, these two effects are likely to balance out.

Required Return on Equity: The required return on equity is a function of the risk-free rate of return and a risk premium. According to the capital asset pricing model, a popularly used risk-return model, the rquired return on equity is:
= Risk-free return + (Beta of equity) ( Expected market risk premium)

Expected Growth Rate in Dividends: The third variable influencing the PE ratio is the expected growth rate in dividends. The expected growth rate in dividends is equal to:
= Retention ratio x Return on Equity.

Cross-Section Analysis

You can look at the PE ratios of similar firms in the industry and take a view on what is a reasonable PE ratio for the subject company.

Alternatively, you can conduct cross-section regression analysis wherein the PE ratio is regressed on several fundamental variables. Here is an illustrative specification:

PE ratio
= a1 + a2 Growth rate in earnings + a2 Dividend payout ratio + a3 Variability of earnings + a4 Company size.

Based on the estimated coefficients of such cross-section regression analysis, the PE ratio for the subject firm may be derived.

Historical Analysis.

You can look at the historical PE ratio of the subject company and take a view on what is a reasonable PE ratio, taking into account the changes in the capital market and the evolving competition.

As an illustration, the prospective PE ratio for Horizon Limited for the past three years was

PE Ratio 20x5 9.25, 20x6 6.63, 20x7 6.23
The average PE ratio for Horizon Limited was: (9.25+6.63+6.23)/3 = 7.37
Considering the changing conditions in the capital market and the emerging competition for Horizon Limite you may say that the average PE for the past three years is applicable in the immediate future as well.


The Weighted PE Ratio

We arrived at two PE ratio estimates:
PE ratio based on the constant growth dividend discount model: 6.36
PE ratio based on historical analysis: 7.37
We can combine these two estimates by taking a simple arithmetic average of them - this means that both the estimates are accorded equal weight. Doing so, we get the weighted PE ratio of:
(6.36+7.37)/2 = 6.87

Understanding Stock Market Return

Stock market return

= fundamental return + speculative return

= (earnings growth + dividend yield) + (change in PE ratio)

http://turtleinvestor888.blogspot.com/2008/03/is-there-such-thing-call-value_19.html