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Multiples

Multiples (Notebook Tab)

Multiples are the basic foundation of most value-oriented screens in which you seek out companies whose market values are low relative to share value measures such as dividends, earnings, and assets. Stock Investor Pro includes a wide range of current and past averages to correspond to your personal investment techniques:

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Stock Investor includes the current multiple; multiple one year ago; and three-, five, and seven-year averages for price-earnings, price-to-book-value per share, price-to-sales per share, price-to-cash flow per share, price-to-free-cash flow per share, and dividend yield. There are

There are also estimated or "forward" price-earnings ratios using analyst forecasted earnings for for the current fiscal year and next two fiscal years.

Percentile rankings, sector medians, and industry medians are provided for comparison purposes and can also be used for screening (this data is not available for the average annual fields).

Stock Investor Price Multiples

Price-Earnings Ratio

Also called the price multiple, the price-earnings ratio is the most popular multiple. Calculated by dividing the current stock price by diluted earnings per share from continuing operations for the last four quarters (trailing 12 months). The price-earnings ratio embodies the market’s expectations regarding a company’s growth prospects and risk. High price-earnings ratios generally represent strong future growth prospects. A low price-earnings ratio represents the market’s low earnings growth expectations for the firm, or the high risk of the firm actually achieving growth. The usefulness of this ratio is limited to those firms that have positive earnings. In addition, earnings are more subject to management assumptions and manipulation than other income statement items (such as sales).

Price to Book Value per Share

Calculated by dividing the current stock price by book value per share for the last fiscal quarter. Book value per share is calculated by subtracting total liabilities from total assets and then dividing by the number of shares outstanding. The price-to-book ratio provides a relatively stable measure of value which can be compared to the market (stock) price. Roughly three-quarters of those companies that have a non-meaningful price-earnings ratio have positive book value. However, a company can also have a non-meaningful price-to-book-value ratio. Over time, many events occur that can distort the book value figure to the point where it bears little resemblance to current economic values. For example, inflation may leave the replacement cost of capital goods within the firm far from their stated book value. Or, the purchase of a firm may lead to the establishment of goodwill, an intangible asset, boosting the level of book value. Different accounting practices across industries may also come into play.

Price to Sales per Share

Calculated by dividing the current stock price by the sales per share for the last four fiscal quarters (trailing 12 months). Unlike earnings and book value, sales are less subject to management assumptions and more difficult to manipulate. Furthermore, all companies that are going concerns have sales, and positive ones at that. Therefore, the vast majority of companies will have meaningful price-sales values. Lastly, sales tend to be less volatile than earnings, making the price-to-sales ratio a more reliable means of valuation. However, price-to-sales ratios do not generally work well for financial firms such as banks, where sales are not a driving force. Also, the price-sales level is driven by profit margins, which tend to vary from industry to industry. Companies in industries with low profit margins, such as supermarkets, tend to sell with very low price-to-sales ratios. For this reason, it is best to compare price-to-sales ratios across companies in similar industries or lines of business.

Price to Cash Flow per Share

Calculated by dividing the current stock price by cash flow per share for the last four fiscal quarters (trailing 12 months). Cash flow has traditionally been calculated by adding non-cash expenses back to earnings after taxes and subtracting dividend payments. Non-cash expenses such as depreciation, depletion, and amortization are expenses that appear on the income statement but require no cash outlays. They represent the accountant’s attempt to measure the reduction of the book value of assets as these assets are depleted. While dividends are a discretionary item, they are a real cash outlay that is not tax deductible and is not reflected in earnings. This measure of cash flow, however, has many weaknesses that arise out of the use of accrual accounting, which attempts to match expenses to revenues when the revenues can be expected or recognized. Decisions regarding the capitalization of expenses, the recognition of revenues, the creation of reserves against losses, and the write-off of assets are just a few of the factors that may vary from firm to firm.

Price to Free Cash Flow per Share

Calculated by dividing the current stock price by free cash flow per share for the last four fiscal quarters (trailing 12 months). Free cash flow is derived by subtracting capital expenditures and dividend payments from cash from operations. Operating cash flow comes from the company’s statement of cash flows and is designed to measure the company’s ability to generate cash from day-to-day operations as it provides goods and services to its customers. It considers factors such as cash from the collection of accounts receivable, the cash incurred to produce any goods or services, payments made to suppliers, labor costs, taxes, and interest payments. This free cash flow figure is considered the excess cash flow that the company can use as it deems most beneficial. Free cash flow is based on cash accounting instead of on earnings based on accrual accounting.

Dividend Yield

An inverse multiple, yield is calculated by dividing the indicated dividend by the current stock price. This field is only meaningful for the roughly 25% of the companies in the Stock Investor database that pay a dividend. Whether a company pays a dividend hinges largely on the current resting point of the company and its industry life cycle. New firms or those that are undergoing rapid growth rarely pay dividends, as this money is better spent on investing in the company’s growth. Over time, as a company matures, the number of internal projects a company can invest in declines and they begin paying out excess profits as dividends. Some investors seek out firms with high, stable dividend yields with the belief that they represent undervalued opportunities. A high dividend yield also serves as protection against further price declines.

PE to Growth - 5 Years

Compares the current PE (price divided by fully diluted EPS for the last 12 months) to the 5-year historical growth rate in earnings per share. The concept behind this ratio is to try to examine whether the valuation (price) of the stock is out of line with earnings and the growth rate in earnings. Stocks that have grown at higher-rates in the past tend to be expected to continue that growth and, therefore, should/could trade with higher PE ratios than stocks with low expectations. As a rule, PE to Growth (PEG) ratio values of 1.0 are considered priced fairly, while ratios below one may point to companies that are under priced relative to their expected future earnings. Companies with PEG ratios above one are potentially overvalued – priced high relative to their expected earnings potential.

PE to Estimated Growth - 5 Years

Forward price-earnings to estimated long-term EPS growth. Compares the forward P/E (price divided by the consensus earnings per share estimate for the current fiscal year) to the analyst forecasted three-to-five-year growth rate in earnings per share. The concept behind this ratio it to try to examine whether the valuation (price) of the stock is out of line with earnings and the growth rate in expected earnings. Stocks with a high-expected growth rate should/could trade with higher P/E ratios than stocks with low expectations for future earnings growth. As a rule, a P/E to Growth (PEG) ratio of 1.0 is considered fairly priced, while ratios below one may point to companies that are under priced relative to their expected earnings. Companies with PEG ratios above one are potentially overvalued – priced high relative to their expected earnings potential.

PE to Dividend Adjusted Growth - 5 Years

The standard PEG ratio adjusted to reflect the dividend yield. This adjustment acknowledges the contribution that dividends make to an investor's total return. It is calculated by dividing the current price-earnings ratio by the sum of the five-year historical earnings per share growth rate and the current dividend yield.

PE using Average EPS - 3 years

The price-earnings ratio using the current share price and the average of the annual fully diluted earnings per share from continuing operations over the last three fiscal years. This figure is calculated by dividing the current stock price by the average of the fully diluted earnings per share from continuing operations for the last three fiscal years. This field is used in the *Graham (Defensive-Industrial) and *Graham (Defensive-Utility) screens in Stock Investor Pro. To bypass the impact of special charges on the earnings per share and management’s discretionary use of reserve accounts as well as to smooth the impact of the business cycle, Graham often averaged earnings over a period of several years.

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