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    CH 3

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    EJ Ravelo
    The document discusses forward PE ratios, which are based on estimated future earnings rather than past earnings. It gives an example of calculating a forward PE ratio for a company called Inactivision, assuming future earnings of $2.50 per share. It also notes that a benchmark PE ratio of 20 would translate to a target stock price of $50 per share in one year if earnings turn out to be the estimated $2.50. For newer companies without dividends or profits, the document suggests using the price-sales ratio instead of the PE ratio, calculating the stock price relative to sales per share.

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    CH 3

    Uploaded by

    EJ Ravelo
    31 views1 page
    The document discusses forward PE ratios, which are based on estimated future earnings rather than past earnings. It gives an example of calculating a forward PE ratio for a company called Inactivision, assuming future earnings of $2.50 per share. It also notes that a benchmark PE ratio of 20 would translate to a target stock price of $50 per share in one year if earnings turn out to be the estimated $2.50. For newer companies without dividends or profits, the document suggests using the price-sales ratio instead of the PE ratio, calculating the stock price relative to sales per share.

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    The document discusses forward PE ratios, which are based on estimated future earnings rather than past earnings. It gives an example of calculating a forward PE ratio for a company called Inactivision, assuming future earnings of $2.50 per share. It also notes that a benchmark PE ratio of 20 would translate to a target stock price of $50 per share in one year if earnings turn out to be the estimated $2.50. For newer companies without dividends or profits, the document suggests using the price-sales ratio instead of the PE ratio, calculating the stock price relative to sales per share.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    31 views1 page

    CH 3

    Uploaded by

    EJ Ravelo
    The document discusses forward PE ratios, which are based on estimated future earnings rather than past earnings. It gives an example of calculating a forward PE ratio for a company called Inactivision, assuming future earnings of $2.50 per share. It also notes that a benchmark PE ratio of 20 would translate to a target stock price of $50 per share in one year if earnings turn out to be the estimated $2.50. For newer companies without dividends or profits, the document suggests using the price-sales ratio instead of the PE ratio, calculating the stock price relative to sales per share.

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    Security analysts spend a lot of time forecasting future earnings, particularly for the

    coming year. A PE ratio that is based on estimated future earnings is called a forward PE
    ratio. For example, suppose you felt that Inactivision’s earnings for the coming year were
    going to be $2.50, reflecting the growing popularity of the company’s World of Slackcraft
    massively multiplayer online role-playing game (MMORPG). In this case, if the current
    stock price is $40, the forward PE ratio is $40/$2.50 = 16.
    Finally, notice that your benchmark PE of 20 applies to earnings over the previous year. If
    earnings over the coming year turn out to be $2.50, then the stock price one year from today
    should be 20 × $2.50 = $50. Forecast prices such as this one are often called target prices.
    Often we will be interested in valuing newer companies that both don’t pay dividends
    and are not yet profitable, meaning that earnings are negative. What do we do then? One
    answer is to use the price-sales ratio, which we also introduced in Chapter 3. As the name
    suggests, this ratio is the price per share on the stock divided by sales per share. You use
    this ratio just like you use the PE ratio, except you use sales per share instead of earnings
    per share. As with PE ratios

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