CONCEPT PAPER
CONCEPT: Concept to evaluate future movement of stock prices of companies on the basis of the changes in the Price Book Value (PBVx), Price to Earnings (PERx) ratios and Market Capitalization over a period of time. Download Concept Paper
METHODOLOGY: Price Earnings (PERx) and Price to Book Value (PBVx), ratios of sample companies are calculated and plotted on a graph, X Axis representing PBVx and Y Axis representing PERx respectively. Market capitalization is depicted as the size of the circle.
SAMPLE DATA: Actual market and financial information of 4 listed companies of the Colombo Stock Exchange has been used as sample data for the purpose of this study.
FINDINGS:
Study found that Stocks move horizontally from East to West or vice versa (From Lower PBVx to High PBVx) when book values are halved or doubled without changing other variables.
Study also found that Stocks move vertically from South to North (From Lower PERx to High PERx) when Earnings are halved or doubled without changing other variables.
Study also found that Stock tend have a span effect on its movement when share prices are doubled or halved without changing other variables. This facilitate investors to determine the movement of share prices in between quarter's when all variable such as EPS and Book Vales remain static.
Centre Point where 1x PBV crosses the 4 x PER is considered as the the equilibrium in which stocks are considered as fairly valued. Similarly any stock that remain in close proximity to the centre can be considered as attractive in terms of valuations.
It is also found that equilibrium PERx determines the period in which investors would recover their investment in full. However the applicable PERx is depended on the opportunity cost of Investments. eg. prevailing FD Rates.
CONCLUSION
Valuation of companies and price of issued shares can be determined by closely monitoring the movement of PBVx and PERx over a period of time. Based on the analysis of the past movement the future share prices can be predicted. According to findings the North to South, vertical movement indicate more under value position whilst West to East, horizontal movement indicate more under over valued position. Also Companies that move close to the equilibrium or the centre indicate fair valuations and its future potential to span North East before having its natural downward trajectory.
This methodology of stock valuation and analysis to be termed as the Astro analysis and Stock Planet Research LLC to implement this methodology to predict and determine future stock prices of companies on best effort basis. Stock Planets Research is the sole owners of the intellectual rights relating to Astro Analysis, its methodology and process.
KEY SEGMENTS & CHARACTERISTICS :
Segment A ( Low PBV/Low PER)
This segment consists of companies that carry a Low Price to Book Value (PBVx) and also Low Price to Earnings Ratio (PERx). These companies are considered undervalued in terms assets and earnings. Low Price to Book Value (PBVx) of these companies implies that total market value shares are less than the values of the net assets owned by these companies. This could also manifest under utilization or over capitalization of the assets which has resulted in lower Return on Assets to the shareholders. These companies and shares can be considered under valued and has greater potential for future growth. Eg. Hayleys PLC (As at January 2023)
Segment B (Low PBV/High PER)
This segment consists of companies that carry a Low Price to Book Value (PBVx) but with a High Price to Earnings Ratio (PERx). The companies which carries these valuations are considered undervalued in terms assets but over valued in terms of earnings. The High PERx also indicate high expectation of investors for much improved earnings growth in the future but Low Price to Book Value (PBVx) of these companies implies that total market value of shares are at a discount to net asset value of the company. These companies and shares can be considered under valued with high investors expectation of future growth. Eg John Keells Holdings PLC. (As at January 2023)
Segment C (High PBV/High PER
This segment consists of companies that carry a High Price to Book Value (PBVx) and a High Price to Earnings Ratio (PERx). The companies which carries these valuations are considered over valued in terms assets as well as its earnings. Whilst Low PERx also indicate the lack of confidence of investor that companies future grwoth potential and high Price to Book Value (PBVx) of these companies implies under capitalization of assets. These companies can be considered over valued in terms of current share price filled with over expectation of the investors. This segment mostly represent trading and services oriented businesses that does not require high capital investment. Eg Expolanka Holdings, Richard Peiris and Company (As at January 2023)
Segment D (High PBV/Low PER)
This segment consists of companies that carry a High Price to Book Value (PBVx) and a Low Price to Earnings Ratio (PERx). The companies which carries these valuations are considered over valued in terms assets but under valued as per its earnings. The Low PERx indicate companies inability to record any positive earnings growth due shortage of performing assets and the lack of investor confidence. Further the high Price to Book Value (PBVx) of these companies implies that the assets are over valued and over utilised and may require recapitalization or further capital infusion in order to be sustainable. This segment mostly represent trading and services oriented businesses that may high capital investment.
Segment E (Negative PER)
This segment consists of companies that carry a negative earning but yet remain solvent due to it positive asset value or positive Price to Book Value (PBVx) multiple. These type of companies require capital restructruing and capital augmentation to remain solvent. If no action is taken, it is likely that these companies will end up with a negative Price to Book Value (PBVx) which may result in eventual bankruptcy and winding up. Investors should be mindful of investing in shares of these companies that may result in capital losses. Eg, Asia Capital PLC, Serendib Engineering PLC. (As at January 2023)
Center Point Z
Point 'Z' Represents the equilibrium or the core centre of Fair Value. Cross point is identified by drawing the PBVx1 line (Price Book Value of the share equals Market value of shares) against the PERx4 line that represent the currently applicable PER expectation. PER 4x is considered fair and reasonable as investors expect minimum return of 25.% p.a. equivalent or less that the prevailing interest/deposit rates. Investor may target companies and shares that are in close proximity to Center Point Valuation to minimise risk of investing.
STOCK COMPARISON
All required data relating to the sample companies have been obtained from the official website of the Colombo Stock Exchange (CSE) Sri Lanka. (Table A)
Respective PERx and PBVx ratio are calculated based on the Market Prices of the sample companies as at the date of the study is obtained from the CSE.
Market Capitalization of the sample companies have been calculated by multiplying the current issued number shares at the rate of the current market price.
Thereafter respective data sets applicable to each of the sample companies are plotted on a graph (Graph-1) that consider the PBVx as the X Axis and PERx as the Y Axis whilst market capitalization represent the size of the each circle.
IMPACT OF FUTURE PRICE CHANGE:
In order to determine the movement of the PERx and PBVx when share prices are significantly changed, we have altered the data by doubling the share price from its current price levels without changing other variables. The relevant data is shown in Table B.
Thereafter we have plotted the respective data sets applicable to each of the sample companies on a graph to determine the movement of the coordinates. (Graph-2)
IMPACT OF FUTURE EARNINGS
In order to determine the movement of the PERx and PBVx when earnings are significantly down, we have altered the data by halving the Earnings Per Share (EPS) without changing other variables. The relevant data is shown in Table C.
Thereafter we have plotted the respective data sets applicable to each of the sample companies on a graph to determine the movement of the coordinates. (Graph-3)
IMPACT OF FUTURE BOOK VALUE
In order to determine the movement of the PERx and PBVx when book values are significantly lowered, we have altered the data by halving the Book Value per Share (BV) without changing other variables. The relevant data is shown in Table D
Thereafter we have plotted the respective data sets applicable to each of the sample companies on a graph to determine the movement of the coordinates. (Graph-4)
KEY FINANCIAL TOOL
Price to Earning Ratio (PERx)
The price-to-earnings ratio is the ratio for valuing a company that measures its current share price relative to its earnings per share (EPS). The price-to-earnings ratio is also sometimes known as the price multiple or the earnings multiple.
P/E shows what the market is willing to pay today for a stock based on its past or future earnings. A high P/E ratio could mean that a stock's price is high relative to earnings and possibly overvalued. Conversely, a low P/E ratio might indicate that the current stock price is low relative to earnings.
P/E ratios are used by investors and analysts to determine the relative value of a company's shares in an apples-to-apples comparison. It can also be used to compare a company against its own historical record or to compare aggregate markets against one another or over time. P/E may be estimated on a trailing (backward-looking) or forward (projected) basis.
The price-to-earnings (P/E) ratio relates a company's share price to its earnings per share.
A high P/E ratio could mean that a company's stock is overvalued, or that investors are expecting high growth rates in the future.
Companies that have no earnings or that are losing money do not have a P/E ratio because there is nothing to put in the denominator.
Two kinds of P/E ratios—forward and trailing P/E—are used in practice.
A P/E ratio holds the most value to an analyst when compared against similar companies in the same industry or for a single company across a period of time.
Price to Book Value Ratio (PBVx)
Price-to-book value (P/B) is the ratio of the market value of a company's shares (share price) over its book value of equity. The book value of equity, in turn, is the value of a company's assets expressed on the balance sheet. The book value is defined as the difference between the book value of assets and the book value of liabilities.
Investors use the price-to-book value to gauge whether a stock is valued properly. A P/B ratio of one means that the stock price is trading in line with the book value of the company. In other words, the stock price would be considered fairly valued, strictly from a P/B standpoint. A company with a high P/B ratio could mean the stock price is overvalued, while a company with a lower P/B could be undervalued.
Investors use the price-to-book value to gauge whether a company's stock price is valued properly.
A P/B ratio of one means that the stock price is trading in line with the book value of the company.
A P/B ratio with lower values, particularly those below one, signals to investors that a stock may be undervalued.
A P/B ratio that's greater than one means that the stock price is trading at a premium to the company's book value.
Download Concept Paper
CONCEPT PAPER.pdfASTRO REPORTS
The financial and stock market information of below mentioned companies are currently being used for purpose of this on going study. You can view company Astro Reports by clicking the respective company name below.
