Price-to-earnings ratio

Business investors want more return from the companies. The Pharma industry is an important part of a healthy economy. It is financially appealing because it is potentially a constantly growing and non-cyclical business. The return on investment over the last few decades has been without equal for any other major industry. Even though Pharma R D is capital intensive, price to earnings ratio returns for... 

Many investors are particularly interested in a company s cash flow and find that the price-to-cash-flow ratio is more useful and reliable than the price-to-earnings ratio. Investors realize that net earnings take into account many noncash charges such as depreciation and amortization that reduce net earnings. Since stock prices fluctuate based on future cash flow projections, this ratio measures stock investment attractiveness. Since investors value companies based on future cash flows, the discussion in later chapters will concentrate on firm value and cash flow. 

Assuming the market price for PepsiCo common stock is 85.00, the price-to-earnings (P/E) ratio is given below ... 

The central issue in any stock offering is price. In traditional, profitable companies price is usually measured as a price/earnings ratio. Since biotech companies rarely are profitable, price is evaluated using the capitalized value of the outstanding stock, i.e., price per share times the total number of shares, compared to other companies at similar stages of development with comparable upside potential. This "market cap" number (either private or public) is what sophisticated biotech investors look to in measuring whether an offering price is fair. Two measures used are postmoney and premoney values. 

To allow for maximum consistent data over a long time frame, we used equity related metrics for this analysis. The basic approach is that the valuation level of the industry (its price-earnings ratio) can be linked to the fundamental value drivers as follows ... 

A bond s yield to maturity will understate (or overstate) the realized compounded yield when the true reinvestment rate is greater than (or less than) the calculated yield to maturity. Figure A4-6 illustrates this relationship for a 10 percent coupon bond that pays 30 in interest every 6 months, has 10 years until it matures, and is originally priced to sell at par (that is, its yield to maturity is equal to the coupon rate). If the annual reinvestment rate is also 10 percent (5 percent per 6-month period), the terminal value of the cash flows received plus the interest earned from the reinvestment of those cash flows will be equal to 2,653.30 1,000 from the maturity value of the bond, 1,000 to be received in the form of coupon payments, and 653.30 from reinvesting the coupons every 6 months to earn a 5 percent, 6-month rate. Given the starting value of 1,000 and the terminal value of 2,653.30, the terminal value ratio is equal to... 

The first two of these are self-evident. The last requires explanation. The average price earnings/ratio of stocks in the USA is about 14 while in Japan, it is close to 40. This forces CEOs in the USA to favor projects having a much shorter development period. This practice rules out... 

This shows the number of years earnings represented by the current market price. It evidences the Stock Market s assessment of the company s ability to maintain or increase earnings. A low P/E ratio will normally indicate a high-risk business, a high ratio a company with potential for growth. 

A key figure in valuing a company is the ratio of its current share price (as an indicator of what the world thinks of it) to the total net profit (earnings) divided by the number of shares (earnings per share). This is called the PjE ratio (price/earnings), and is a major tool in comparing the performance of a company within its class of similar companies. 

In 1991, Schipper showed that the information analysts produce improves the market efficiency by helping investors to value companies assets more accurately . In line with this statement, we presume that if everyone started using TRP ratio as the proper measure of stock s value, assets would be priced more efficiently and the opportunity of earning higher abnormal returns would disappear. We therefore conclude that there are clear indications the market currently operates inefficiently, but with more frequent use of this important information, it could become efficient. 

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