Most investors are looking the EPS to value a company before invest a lots of money in there, it's that accurate ?
2006-06-19 04:43:33 · 6 answers · asked by fatsen 1 in Business & Finance ➔ Investing
Yes, it is accurate, as it's the easiest one to calculate - you take the company profits (reported on their balance sheet and income statement) and you divide that by the number of shares issued.
2006-06-19 04:45:59 · answer #1 · answered by Anonymous · 0⤊ 0⤋
It is -- pure and simple -- crap.
Well -- mostly crap. If you have two companies that are almost identicle and you know the PE ratio of one, you should be able to find the value of the other using the PE ratio.
If you have a company that has had a fairly stable PE ratio through time then it should have about the same PE ratio now.
So the 'crap' statement might be hyperbole.
But if you have an industry where things are changing rapidly, or there are changes in growth or capital structure -- the PE ratios are pretty meaningless.
In a simple model of valuing equity, the value of the equity will be equal to the PF of the future cash flows. That is, the equity value will be:
Equity = C/(r-g)
where C is the cash flow to equity. Well -- for many companies, earnings are a good approximation to cash flows, so
Equity = E/(r-g)
Here, C is cash flow to equity, r is the expected return on equity, g is the growth rate and E is earnings.
When does this not work? when the inputs change!
If 'r'changes, PE ratio is no good. This could happen for two reasons -- the firm is changing the capital structure (debt vs equity) or the risk profile of the firm is changing.
'g' changes -- Growth can and does change. Growth firms mature, cyclical firms have growth spurts during good times & lose sales in recessions. PE ratio is very sensitive to changes in the growth rate.
"C" can change -- but we pretty much cover that in the 'g' variable -- though is you are starting off with a cash flow in an abnormal year, it can through off all your calculations.
I mentioned that for many firms Earnings is a good proxy for Cash flow -- but this is really only true for mature firms -- and even then there are other things that change cash flow that do not affect earnings.
Finally -- how do you value firms that have no earnings? They may have huge potential -- but nothing now.
What some do is they break the firm into two parts -- the part that can be explained in terms of earnings, and the part that can be explained in terms of Real Options.
Many analysts use PE ratios. But if that is all they use, they aren't particularly good analysts.
PE ratios may give you a "ballpark figure" but shouldn't be relied on too heavily.
2006-06-19 05:56:30 · answer #2 · answered by Ranto 7 · 0⤊ 0⤋
no! eps is the overall of the stock over its year or lifetime. i invest in the market and look at where the company is at and its cash and capital to grow. you can see a negative eps, but the stock is climbing. i've seen positive eps and the stock goes down. my best advice is to know your stock like you know your best friend. know everything about it and what it does. by doing the deep research you will get the insight to the stock. most analysts are wrong 95 percent of the time as said on the cnbc show.
2006-06-19 04:52:03 · answer #3 · answered by hollywood71@verizon.net 5 · 0⤊ 0⤋
It's a good place to start in valuing a company...but one should not invest solely on the EPS numbers
2006-06-19 04:47:44 · answer #4 · answered by Black Fedora 6 · 0⤊ 0⤋
It might be accurate, but I do a lot more research before deciding to invest lots of money in a company.
2006-06-19 05:40:06 · answer #5 · answered by Josefina R 2 · 0⤊ 0⤋
yes, just as accurate as analyst's reports :)
2006-06-19 05:11:43 · answer #6 · answered by akg 3 · 0⤊ 0⤋