Die prys/verdienste verhouding as hulpmiddel by die waardering van aandele

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SUMMARY

The current price/earnings ratio V_mo = P_mo/E_o, where P_mo is the current market price and E_o the latest earnings per share, is used by many investors to evaluate the investment merits of ordinary shares. Some investors simply assume that a given share, selling at a high V_mo ratio, is a more lucrative investment than a share selling at a lower ratio. This may, of course, be a risky approach to portfolio management. It is suggested that more rational criteria, based on a theoretical valuation of the share, be used.

Firstly, a model is constructed for the valuation of shares, based on the assumption that the earnings per share (E_o) grow at a rate g for the first n years, then at a rate g' for n' years, g” for n” years, and so forth, where generally g > g' > g” >…

In this model provision is made for different reinvestment rates, b, b', b“…, and discount rates (rate of return required by shareholders) y, y', y”… This model is a generalisation of the exponential growth model, and is based on the point of view that earnings-growth will not be constant over time, but will grow at a declining rate, which may be closer to reality. By using increasing rates of discount, compensation is being made to some extent for greater uncertainty regarding dividend expectations the further one looks into the future.

Formula (3.5) is used to calculate P_to, the present theoretical price of the share. P_to, in conjunction with P_mo, is then used to judge the investment merits of the share. A valuation coefficient W_p = (P_to—P_mo)/P_mo is defined, which may be used to compare different shares—generally the greater W_p, the better the investment merits of the share. Similarly, a valuation coefficient W_v = (V_to—V_mo)/V_mo is defined, which may be of use to those investors interested in the price/earnings ratio. Here V_to = P_to/E_o, the theoretical price/earnings ratio, is compared to the market ratio V_mo = P_mo/E_o. This is a better criterion than V_mo on its own. It is shown that W_p = W_v. Furthermore, reference is made to the ratio V_tn+n' = P_{t, n+n'}/E_n, which is then also compared with V_mo. It is shown that a share with a higher V_mo ratio and a higher expected growth rate (g) is not necessarily a better investment than a share selling at a lower V_mo ratio and a lower expected growth rate.