tag:blogger.com,1999:blog-14935018231809920252024-03-13T14:37:28.446-07:00Financial Statement AnalysisAnonymoushttp://www.blogger.com/profile/12311131598186998069noreply@blogger.comBlogger3125tag:blogger.com,1999:blog-1493501823180992025.post-72276671254670172042013-06-19T18:22:00.004-07:002013-06-19T18:22:50.847-07:00Price to Earnings Ratio (P/E Ratio)<div class="MsoNormal" style="margin-bottom: 0.0001pt;">
<b><u><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">Definition</span></u></b></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">The
price to earnings ratio (P/E ratio) is the ratio of market price per share to
earning per share. The P/E ratio is a valuation ratio of a company's current
price per share compared to its earnings per share. It is also sometimes known
as “<span style="background: yellow; mso-highlight: yellow;">earnings multiple” or
“price multiple</span>”. <o:p></o:p></span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">Though
Price-earning ratio has several imperfections but it is still the most
acceptable method to evaluate prospective investments. It is calculated by
dividing “Market Value per Share (P)” to “Earnings per Share (EPS)”. Market value
of share can be taken from stock market or online and earning per share figure
can be calculated by dividing net annual earnings to total number of shares
(Net Annual Earnings/Total number of shares).<o:p></o:p></span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">P/E
ratio is a widely used ratio which helps the investors to decide whether to buy
shares of a particular company. It is calculated to estimate the appreciation
in the market value of equity shares.<o:p></o:p></span></div>
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<b><u><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">Calculation (formula)<o:p></o:p></span></u></b></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">Price
to Earnings Ratio = Market Price per Share / Earnings per Share<o:p></o:p></span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">Price
to Earnings Ratio = Market Capitalization / Earnings after Taxes and Preference
Dividends<o:p></o:p></span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">The
P/E ratio tells how much the market is willing to pay for a company’s earnings.
A higher P/E ratio means that the market is more willing to pay for the
earnings of the company. <span style="background: yellow; mso-highlight: yellow;">Higher</span>
price to earnings ratio indicates that the <span style="background: yellow; mso-highlight: yellow;">market has high hopes for the future of the share and
therefore it has bid up the price.</span> On the other hand, <span style="background: aqua; mso-highlight: aqua;">a lower</span> price to earnings
ratio indicates the <span style="background: aqua; mso-highlight: aqua;">market
does not have much confidence in the future of the share</span>.<o:p></o:p></span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">The
average P/E ratio is <span style="background: lime; mso-highlight: lime;">normally
from 12 to 15</span> however it depends on <span style="background: aqua; mso-highlight: aqua;">market and economic</span> conditions. P/E ratio may also
vary among different <span style="background: aqua; mso-highlight: aqua;">industries
and companies</span>. P/E ratio indicates what amount an investor is paying
against every dollar of earnings. A higher P/E ratio indicates that an investor
is paying more for each unit of net income. So P/E ratio between 12 to 15 is
acceptable.<o:p></o:p></span></div>
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<a href="http://people.stern.nyu.edu/adamodar/New_Home_Page/datafile/pedata.html">http://people.stern.nyu.edu/adamodar/New_Home_Page/datafile/pedata.html</a></div>
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<b><u><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">Example</span></u></b><b><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">.<o:p></o:p></span></b></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">If Company A shares are trading at $5/share and
most recent EPS is $0.2/share. The P/E ratio will be $5/$0.2 = 25x. This
indicates that the investors are paying $25 for every $1 of company’s earnings.
Companies with no profit or negative earnings have no P/E ratio and usually
written as “N/A”. <o:p></o:p></span></div>
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<b><u><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">Conclusion<o:p></o:p></span></u></b></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">A
higher P/E ratio may <span style="background: fuchsia; mso-highlight: fuchsia;">not
always be a positive indicator</span> because a higher P/E ratio may also
result from <span style="background: fuchsia; mso-highlight: fuchsia;">overpricing
of the shares</span>. Similarly, a lower P/E ratio may <span style="background: silver; mso-highlight: silver;">not always be a negative</span> indicator because
it may mean that the <span style="background: silver; mso-highlight: silver;">share
has been overlooked by the market</span> i.e. undervalued. Sometimes, a low P/E ratio indicates a company is headed
over several issues or the company itself has warned a low earnings than
expected. Therefore, P/E ratio <b><u>should be used cautiously</u></b>.
Investment decisions should not be based solely on the P/E ratio. It is better
to use it in conjunction with other ratios and measures. <o:p></o:p></span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt;">The
widely discussed problem in P/E ratio is that the denominator i.e. Earnings
figure, considers non cash items. Earnings figure can easily be manipulated by
playing with non cash items, for example, depreciation or amortization. If it
is not manipulated deliberately, earnings figure is still affected by non cash
items. That is why a large number of investors are now using “Price/Cash Flow
Ratio” which removes non cash items and considers cash items only.<o:p></o:p></span></div>
Anonymoushttp://www.blogger.com/profile/12311131598186998069noreply@blogger.com0tag:blogger.com,1999:blog-1493501823180992025.post-68722452837375029922013-06-19T16:49:00.000-07:002013-06-19T16:49:01.252-07:00 How to Analyze Earnings – varieties of EPS<div class="MsoNormal">
<span style="font-family: F14, sans-serif; font-size: 10pt; line-height: 115%;">By definition, EPS is net income
divided by the number of shares outstanding, The math may be simple, however,
both the numerator and denominator can change depending on how you define
"earnings" and "shares outstanding."</span></div>
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<span style="font-family: F14, sans-serif; font-size: 10pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "F14","sans-serif"; font-size: 10.0pt; line-height: 115%; mso-bidi-font-family: F14;">There are numerous ways to define
earnings, so let's start with shares outstanding. <o:p></o:p></span></div>
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<span style="font-family: "F14","sans-serif"; font-size: 10.0pt; line-height: 115%; mso-bidi-font-family: F14;"><br /></span></div>
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<b><u><span style="font-family: "F14","sans-serif"; font-size: 10.0pt; line-height: 115%; mso-bidi-font-family: F14;">A . Shares Outstanding <o:p></o:p></span></u></b></div>
<div class="MsoNormal">
<span style="font-family: "F14","sans-serif"; font-size: 10.0pt; line-height: 115%; mso-bidi-font-family: F14;">Shares outstanding can be
classified as either primary, or basic, (primary EPS) or fully diluted (diluted
EPS). Primary EPS is calculated using the number of shares that have been
issued and held by investors. These are the shares that are currently in the
market and can be traded. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: "F14","sans-serif"; font-size: 10.0pt; line-height: 115%; mso-bidi-font-family: F14;">Diluted EPS entails a complex
calculation that determines how many shares would be outstanding <span style="background: lime; mso-highlight: lime;">if all exercisable warrants,
options, etc</span>. were converted into shares at a point in time, generally
the end of a quarter. Diluted EPS is preferred, because it is a <span style="background: lime; mso-highlight: lime;">more conservative number</span> that
calculates EPS, as if all possible shares were issued and outstanding. The
number of diluted shares can change as share prices fluctuate (as options <span style="background: lime; mso-highlight: lime;">fall into</span>/out of <span style="background: lime; mso-highlight: lime;">the money</span>), but generally the
Street assumes the number is fixed.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: "F14","sans-serif"; font-size: 10.0pt; line-height: 115%; mso-bidi-font-family: F14;"> Companies report both primary and diluted EPS
and the focus is generally on diluted EPS, but investors should not assume this
is always the case. Sometimes, diluted and primary EPS are the same, because
the company does not have any "<span style="background: lime; mso-highlight: lime;">in-the-money" options</span>, warrants or convertible bonds
outstanding. Companies can discuss either, so investors need to be sure which
is being used. <o:p></o:p></span></div>
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<span style="font-family: "F14","sans-serif"; font-size: 10.0pt; line-height: 115%; mso-bidi-font-family: F14;"><br /></span></div>
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<b><u><span style="font-family: "F14","sans-serif"; font-size: 10.0pt; line-height: 115%; mso-bidi-font-family: F14;">B. Earnings <o:p></o:p></span></u></b></div>
<div class="MsoNormal">
<span style="font-family: "F14","sans-serif"; font-size: 10.0pt; line-height: 115%; mso-bidi-font-family: F14;">As a general rule, EPS can be
whatever the company wants it to be, depending on assumptions and accounting
policies. Corporate spin doctors focus media attention on the number the
company wants in the news, which may or may not be the EPS reported in
documents filed with the Securities Commission (SC). Based on a set of
assumptions, a company can report a high EPS, which reduces the P/E multiple
and makes the stock look undervalued. The EPS reported, however, can result in
a much lower EPS and an overvalued stock on a P/E basis. This is why it is
critical for investors to read carefully and know what type of earnings is
being used in the EPS calculation. <o:p></o:p></span></div>
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<span style="font-family: "F14","sans-serif"; font-size: 10.0pt; line-height: 115%; mso-bidi-font-family: F14;"><br /></span></div>
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<b><u><span style="font-family: "F14","sans-serif"; font-size: 10.0pt; line-height: 115%; mso-bidi-font-family: F14;">C. EPS<o:p></o:p></span></u></b></div>
<div class="MsoNormal">
<span style="font-family: "F14","sans-serif"; font-size: 10.0pt; line-height: 115%; mso-bidi-font-family: F14;">While the math may be simple,
there are many varieties of EPS being used these days and investors must
understand what each one represents, if they're to make informed investment
decisions. For example, the EPS announced by a company may differ significantly
from what is reported in the financial statements and in the headlines. As a
result, a stock may appear over or under-valued depending on the EPS being
used. This article will define some of the varieties of EPS and discuss their
pros and cons. <o:p></o:p></span></div>
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<span style="font-family: "F14","sans-serif"; font-size: 10.0pt; line-height: 115%; mso-bidi-font-family: F14;"><br /></span></div>
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<span style="font-family: "F14","sans-serif"; font-size: 10.0pt; line-height: 115%; mso-bidi-font-family: F14;">There are five (5) types of EPS to
be defined in the context of the type of "earnings" being used:<o:p></o:p></span></div>
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<span style="font-family: "F14","sans-serif"; font-size: 10.0pt; line-height: 115%; mso-bidi-font-family: F14;"><br /></span></div>
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<b><span style="font-family: "F14","sans-serif"; font-size: 10.0pt; mso-bidi-font-family: F14;">Reported EPS (or GAAP
EPS) <o:p></o:p></span></b></div>
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<span style="font-family: "F14","sans-serif"; font-size: 10.0pt; mso-bidi-font-family: F14;">We define reported EPS as the number derived from
generally accepted accounting principles (GAAP), which are reported in SC
filings. The company derives these earnings according to the accounting
guidelines used. A company's reported earnings can be distorted by GAAP. For
example, a one-time gain from the sale of machinery or a subsidiary could be
considered as operating income under GAAP and cause EPS to spike. Also, a
company could classify a large lump of normal operating expenses as an
"unusual charge," which can boost EPS because the "unusual
charge" is excluded from calculations. Investors need to read the
footnotes in order to decide what factors should be included in
"normal" earnings and make adjustments in their own calculations. (To
learn more about what can be found in the footnotes). <o:p></o:p></span></div>
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<b><span style="font-family: "F14","sans-serif"; font-size: 10.0pt; mso-bidi-font-family: F14;">Ongoing EPS <o:p></o:p></span></b></div>
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<span style="font-family: "F14","sans-serif"; font-size: 10.0pt; mso-bidi-font-family: F14;">Ongoing EPS is calculated based upon normalized, or
ongoing, net income and <span style="background: lime; mso-highlight: lime;">excludes
anything that is an unusual one-time event.</span> The goal is to find the
stream of earnings from core operations, which can be used to forecast future
EPS. This can mean excluding a large one-time gain from the sale of equipment,
as well as an unusual expense. Attempts to determine an EPS using this
methodology is also called "pro forma" EPS. <o:p></o:p></span></div>
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<b><span style="font-family: "F14","sans-serif"; font-size: 10.0pt; mso-bidi-font-family: F14;">Pro Forma EPS <o:p></o:p></span></b></div>
<div class="MsoNormal" style="margin-bottom: 0.0001pt;">
<span style="font-family: "F14","sans-serif"; font-size: 10.0pt; mso-bidi-font-family: F14;">The words "pro forma" indicate that <span style="background: lime; mso-highlight: lime;">assumptions</span> were used to
derive whatever number is being discussed. Different from reported EPS, pro
forma EPS generally <span style="background: lime; mso-highlight: lime;">excludes
some expenses or income</span> that were used in calculating reported earnings.
For example, if a company sells a large division, it could, in reporting
historical results, exclude the expenses and revenues associated with that
unit. This allows for more of an "apples-to-apples" comparison. <o:p></o:p></span></div>
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<br /></div>
<div class="MsoNormal" style="margin-bottom: 0.0001pt;">
<span style="font-family: "F14","sans-serif"; font-size: 10.0pt; mso-bidi-font-family: F14;">Another example of pro forma is a company choosing to
exclude some expenses, because management feels that the expenses are
non-recurring and distort the company's "true" earnings. Non-recurring
expenses, however, seem to appear with increasing regularity these days. This
raises questions as to whether management knows what it's doing, or is trying
to build a "rainy day fund" to smooth EPS. <o:p></o:p></span></div>
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<b><span style="font-family: "F14","sans-serif"; font-size: 10.0pt; mso-bidi-font-family: F14;">Headline EPS <o:p></o:p></span></b></div>
<div class="MsoNormal" style="margin-bottom: 0.0001pt;">
<span style="font-family: "F14","sans-serif"; font-size: 10.0pt; mso-bidi-font-family: F14;">The headline EPS is the EPS number that is
highlighted in the company's press release and picked up in the media.
Sometimes it is the pro forma number, but it could also be an EPS number that
has been calculated by the analyst or pundit that is discussing the company.
Generally, sound bites do not provide enough information to determine which EPS
number is being used. (For more on how companies can skew their results, read 5
Tricks Companies Use During Earnings Season.)<o:p></o:p></span></div>
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<b><span style="font-family: "F14","sans-serif"; font-size: 10.0pt; mso-bidi-font-family: F14;">Cash EPS <o:p></o:p></span></b></div>
<div class="MsoNormal" style="margin-bottom: 0.0001pt;">
<span style="font-family: "F14","sans-serif"; font-size: 10.0pt; mso-bidi-font-family: F14;">Cash EPS is operating cash flow (not EBITDA) divided
by diluted shares outstanding. Generally, cash EPS is more important than other
EPS numbers, because it is a "purer" number. Cash EPS is better
because operating cash flow cannot be manipulated as easily as net income and
represents real cash earned, calculated by including changes in key asset
categories, such as receivables and inventories. For example, a company with
reported EPS of 50 cents and cash EPS of $1 is preferable to a firm with
reported EPS of $1 and cash EPS of 50 cents. Although there are many factors to
consider in evaluating these two hypothetical stocks, the company with cash is
generally in better financial shape. <o:p></o:p></span></div>
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<span style="font-family: "F14","sans-serif"; font-size: 10.0pt; mso-bidi-font-family: F14;">Other EPS numbers have overshadowed cash EPS, but we
expect it to get more attention because of the new GAAP rule (SFAS 142), which
allows companies to stop amortizing goodwill. This version of "cash
EPS" is more like EBITDA per share and does not factor in changes in
receivables and inventory. Consequently, it may not be as good as
operating-cash-flow EPS, but is better in certain cases than other forms of
EPS. <o:p></o:p></span></div>
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<b><u><span style="font-family: "F14","sans-serif"; font-size: 10.0pt; mso-bidi-font-family: F14;">D. Conclusion<o:p></o:p></span></u></b></div>
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<br />
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<span style="font-family: "F14","sans-serif"; font-size: 10.0pt; mso-bidi-font-family: F14;">There are many types of EPS being used and investors
need to know what the EPS numbers they see represent and determine whether they
are a good representation of a company's earnings. A stock may look like a
great value because it has a low P/E, but that ratio may be based on
assumptions which, upon further research, you might not agree with.<o:p></o:p></span></div>
Anonymoushttp://www.blogger.com/profile/12311131598186998069noreply@blogger.com0tag:blogger.com,1999:blog-1493501823180992025.post-81695773849937339302013-06-17T03:23:00.002-07:002013-06-17T03:23:57.311-07:00<div class="MsoNormal" style="margin-bottom: 0.0001pt;">
Financial Reporting &
Analysis<o:p></o:p></div>
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<br /></div>
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Audit Opinion / Qualification<o:p></o:p></div>
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<br /></div>
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What is an audit opinion?<o:p></o:p></div>
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An audit opinion is expressed on audited statements. It is required
that an auditor state in the opinion that generally accepted accounting
principles have been followed that they have been applied on a basis consistent
with that used the preceding year.<o:p></o:p></div>
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Types of Audit Opinions<o:p></o:p></div>
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Unqualified opinion — The unqualified opinion has no reservations
concerning the financial statements. This is also known as a clean opinion
meaning that the financial statements appear to be presented fairly.<o:p></o:p></div>
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<br /></div>
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Qualified opinion / “Except for” — This means that the auditor has
taken exception to certain current-period accounting applications or is unable
to establish the potential outcome of a material uncertainty as a going concern.<o:p></o:p></div>
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<br /></div>
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Disclaimer opinion — This is a special type of audit report that should
be issued when the auditor permits his or her name to be associated with
financial statements that were not examined in accordance with generally
accepted auditing standards. Sometime due to
inablility to express opinion or pervasive uncertainty.<o:p></o:p></div>
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<br /></div>
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Adverse opinion — This is a type of audit opinion which states that the
financial statements have material effect on fair presentation of the financial position, results of operations,
and changes in financial position, in conformity with generally accepted
accounting principles.<o:p></o:p></div>
Anonymoushttp://www.blogger.com/profile/12311131598186998069noreply@blogger.com0