Valuing stocks

Ritesh Pandey

September 1, 2023

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 The Dividend-Discount Model

Table of Contents

1 The Dividend-Discount Model

2 Total Payout and Free Cash Flow Valuation Models

3 Valuation Based on Comparable Firms

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 The Dividend-Discount Model

A One-Year Investor

0 1

−P0 Div1 + P1

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 The Dividend-Discount Model

A One-Year Investor

Both Div1 and P1 are uncertain/risky cash flows.

So, they have to be discounted back not at the risk-free rate rf

but at the equity cost of capital, rE .

rE is the expected return of other investments available in the

market with risk equivalent to the risk of the firm’s shares.

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 The Dividend-Discount Model

A One-Year Investor

Div1 +P1
Consider the PV of the date 1 cash flows : 1+rE

Div1 +P1
If P0 ≤ 1+rE , the investor will be willing to buy the stock.

Div1 +P1
If P0 ≥ 1+rE , the investor will be willing to sell the stock.

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 The Dividend-Discount Model

A One-Year Investor

For every buyer of stock, there must be a seller of stock.

So both equations must hold simultaneously.

So,
Div1 + P1
P0 = (1)
1 + rE

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 The Dividend-Discount Model

A One-Year Investor

Solving for rE , we get,

Div1 P1 − P0
rE = + (2)
P P
| {z0 } | {z0 }
|{z}
Total Return on the Stock
Dividend Yield Capital Gain Rate

So, the stock’s total return must equal the equity cost of
capital.

So, the stock’s total return must equal the expected return on
other investments with equivalent risk available in the market .

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 The Dividend-Discount Model

A One-Year Investor

Suppose you expect Walgreen company ( a drugstore chain) to pay

dividends of $ 0.44 per share and trade for $ 33 per share at the end
of the year. If investments with equivalent risk to Walgreen’s stock
have an expected return of 8.5%, what is the most you would pay
today for Walgreen’s stock? What dividend yield and capital gain
rate would you expect at this price?

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 The Dividend-Discount Model

A One-Year Investor

Div1 +P1 0.44+33.00

P0 = 1+rE = 1.085 = $30.82.

0.44
Div1 /P0 = 30.82 = 1.43%

Expected capital gain = $33.00 - $30.82 = $ 2.18 per share.

Capital gain rate = 2.18/30.82 = 7.07%.

At this price, Walgreen’s expected total return = 1.43+ 7.08

= 8.5% which is equal to its cost of capital.

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 The Dividend-Discount Model

A Multi-Year Investor

0 1 2

−P0 Div1 Div2 + P2

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 The Dividend-Discount Model

A Multi-Year Investor

Assume that the equity cost of capital is the same for both
years.

As before, no-arbitrage sugests that Price of stock will equal

the PV of its cash inflows.

Div1 Div2 + P2
P0 = + (3)
1 + rE (1 + rE )2

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 The Dividend-Discount Model

A Multi-Year Investor

Does this mean that the two-year investor will value the stock
differently than a one-year investor?

NO. The one-year investor does not care about the year-2 cash
flows directly but he does care about them indirectly as they
affect the price at which he will have to sell the stock at the
end of year-1, P1 .

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 The Dividend-Discount Model

A Multi-Year Investor

Div1 + P1
P0 = (4)
1 + rE
P1
z }| {
Div1 1  Div + P 
2 2
= + (5)
1 + rE 1 + rE 1 + rE
So, for a two-period investor,
Div1 Div2 + P2
P0 = + (6)
1 + rE (1 + rE )2

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 The Dividend-Discount Model

A Multi-Year Investor

For an N-period investor:

Div1 Div2 DivN PN
P0 = + + ... + + (7)
1 + rE (1 + rE )2 (1 + rE )N (1 + rE )N

This holds for any N. So, investors with same beliefs will
attach the same value to the stock, irrespective of their
investment horizon.

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 The Dividend-Discount Model

A Multi-Year Investor

If the firm eventually pays dividends and is never acquired, it is

possible to hold its shares forever. Then,
∞
Div1 Div2 X DivN
P0 = + 2
+ ... = (8)
1 + rE (1 + rE ) (1 + rE )N
n=1

The above two equations represent the Dividend Discount

Model: The price of a stock is equal to the present value of
the expected future dividends it will pay.

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 The Dividend-Discount Model

Constant Dividend Growth Rate

Assume that the dividends grow forever at a constant rate g .

0 1 2 3

≈
−P0 Div1 Div1 (1 + g ) Div1 (1 + g )2

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 The Dividend-Discount Model

Constant Dividend Growth Rate

Using the formula for a perpetuity growing at a constant rate,

Div1
P0 = for g < rE (9)
rE − g
This represent the Constant Dividend Growth Model: The
price of a stock is equal to the dividend for the coming year,
divided by the equity cost of capital adjusted for the expected
growth rate of dividends.

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 The Dividend-Discount Model

Constant Dividend Growth Rate

Consolidated Edison, Inc. (Con Edison), is a regulated utility com-

pany that services the New York City area. Suppose Con Edison plans
to pay $ 2.36 per share in dividends in the coming year. If its equity
cost of capital is 7.5% and dividends are expected to grow by 1.5%
per year in the future, estimate the value of Con Edison’s stock.

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 The Dividend-Discount Model

Constant Dividend Growth Rate

Div1 $2.36
P0 = = = $39.33 per share.
rE − g 0.075 − 0.015

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 The Dividend-Discount Model

Constant Dividend Growth Rate

The above formula can be also used to estimate the equity

cost of capital:
Div1
rE = +g (10)
P0

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 The Dividend-Discount Model

Constant Dividend Growth Rate

What determines the growth rate of dividends g ?

The firm faces a trade off: Increasing growth may require

investment and money spent on investment cannot be used to
pay dividends.

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 The Dividend-Discount Model

Constant Dividend Growth Rate

Let us define a Dividend Payout Rate: the fraction of its

earnings that the firm pays as dividends each year.

Then, intuitively,
Earningst
Divt = ×Dividend Payout Ratet (11)
Shares Outstandingt
| {z }
EPSt

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 The Dividend-Discount Model

Constant Dividend Growth Rate

This means that in order to increase dividends the firm can

1 Increase Earnings
2 Increase its dividends payout rate
3 Decrease the number of its shares outstanding

Let us assume that it does not issue new shares or buy back its
outstanding shares so that the number of shares outstanding is
constant.

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 The Dividend-Discount Model

Constant Dividend Growth Rate

The firm can now do two things with its earnings:

1 Retain and reinvest them. This causes future earnings (and
therefore, future dividends ) to grow.
2 Pay them out to investors as current dividends

Let us assume that if the firm it does not reinvest its earnings,
the future level of its earnings remains constant at its current
level.

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 The Dividend-Discount Model

Constant Dividend Growth Rate

Let us define a Dividend Retention Rate: the fraction of its

earnings that the firm retains with itself.

Then, intuitively,
New Investment = Earnings × Retention Rate (12)

And since
Change in Earnings = New Investment × Return on New Investment (13)

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 The Dividend-Discount Model

Constant Dividend Growth Rate

We get
Change in Earnings
Earnings Growth Rate = (14)
Earnings
= Retention Rate × Return on New Investment (15)

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 The Dividend-Discount Model

Constant Dividend Growth Rate

Note that
Retention Rate (%) = 100 − Payout Rate (%) (16)

NOTE: If the firm keeps its dividend payout rate, g , constant,

then this rate will equal the earnings growth rate.
g = Retention Rate × Return on New Investment (17)

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 The Dividend-Discount Model

Cutting Dividends for Profitable Growth

Crane Sporting Goods expects to have earnings per share of $6 in

the coming year. Rather than reinvest these earnings and grow, the
firm plans to pay out all of these earnings as a dividend. With these
expectations of no growth, Crane’s current share price is $60.

Suppose Crane could cut its dividend payout rate to 75% for the
forseeable future and use the retained earnings to open new stores.
The return on its investment in these new stores is expected to be
12%. Assuming its cost of equity is unchanged, what effect would
this new policy have on Crane’s price?

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 The Dividend-Discount Model

Cutting Dividends for Profitable Growth

First let us estimate Crane’s equity cost of capital.

Div1 $6
Current dividend yield, P0 = $60 = 10%

Currently, there is no expected growth. So, g = 0.

Div1
rE = P0 + g = 10% + 0% = 10%.

So, to justify Crane’s current stock price, the expected return

on other stocks in the market with equivalent risk would be
10%.

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 The Dividend-Discount Model

Cutting Dividends for Profitable Growth

With new policy, payout rate = 75% instead of 100%.

So, Div1 = EPS1 × 0.75 = $6 × 0.75 = $4.50.

While dividends will fall, due to reinvestment of retained

earnings, growth rate becomes positive from zero.

g = retention rate × return on new investment

So, g = 25% × 12% = 3%.

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 The Dividend-Discount Model

Cutting Dividends for Profitable Growth

So, under the new policy,

P0 = rDiv1
E −g
$4.50
= 0.10−0.03 = $64.29.

Thus, Crane’s share price should rise from $60 to $64.29 if its
cuts dividends to increase investment and growth, implying the
investment has positive NPV.

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 The Dividend-Discount Model

Cutting Dividends for Profitable Growth

By using its earnings to invest in projects that offer a rate of return

(12%) that is greater than its equity cost of capital (10%), Crane
has created value for its shareholders.

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 The Dividend-Discount Model

Unprofitable Growth

Suppose Crane Sporting Goods actually decides to cut its dividend

payout rate to 75% to invest in new stores. But now suppose that
the return on these new investments is 8% rather than 12%. Given
its expected earnings per share this year of $6 and its equity cost of
capital of 10%, what will happen to Crane’s current share price in
this case.

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 The Dividend-Discount Model

Unprofitable Growth

Crane’s dividend will fall to $6 × 75% = $4.50.

Its growth under the new policy, given the lower return on
investment, will be g = 25% × 8% = 2%
$4.50
The new share price, P0 = 0.10−0.02 = $56.25

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 The Dividend-Discount Model

Unprofitable Growth

Thus even though Crane will grow under the new policy, its
investments will have negative NPV.

This is because the new stores earn 8% when its investors could
have earned 10% on other investments with comparable risk.

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 The Dividend-Discount Model

Dividend Discount Model with Constant Long Term

Growth Rate

For several young firms, the initial phase is characterized by

high earnings growth rates

At the same time they face good investment opportunities.

So, they may reinvest all their earnings initially.

As they reach a mature phase, growth opportunities become

fewer and they start paying out dividends.

We can value such firms using a two-stage dividend discount

model.

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 The Dividend-Discount Model

Dividend Discount Model with Constant Long Term

Growth Rate

Assume that the firm starts paying dividends from t = N and these
grow at a constant rate of g .
0 1 2 N N+1 N+2 N+3

Div1 Div2 DivN + PN DivN+1 DivN+1 (1 + g ) DivN+1 (1 + g )2

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 The Dividend-Discount Model

Dividend Discount Model with Constant Long Term

Growth Rate

DivN+1
PN = (18)
rE − g
And, then,
Div1 Div2 DivN 1  Div
N+1

P0 = + 2
+ ... + N
+ N
(19)
1 + rE (1 + rE ) (1 + rE ) (1 + rE ) rE − g

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 The Dividend-Discount Model

Valuing a Firm with Two Different Growth Rates

Small Fry, Inc. has just invented a potato chip that looks and tastes
like a french fry. Given the phenomenal market response to this
product, Small Fry is reinvesting all of its earnings to expand its op-
erations. Earnings were $2 per share this past year and are expected
to grow at a rate of 20% per year until the end of year 4. At that
point, other companies are likely to bring out competing products.
Analysts project that at the end of year 4, Small Fry will cut in-
vestment and begin paying 60% of its earnings as dividends and its
growth will slow to a long-run growth rate of 4%. If Small Fry’s
equity cost of capital is 8%,what is the value of a share today?

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 The Dividend-Discount Model

Valuing a Firm with Two Different Growth Rates

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 The Dividend-Discount Model

Valuing a Firm with Two Different Growth Rates

Div4 $2.49
Clearly, P3 = rE −g = 0.08−0.04 = $62.25
With this as the terminal value, we can compute current share
price.
Div1 Div2 Div3 P3
P0 = + 2
+ 3
+
1 + rE (1 + rE ) (1 + rE ) (1 + rE )3
$62.25
=
(1.08)3
= $49.42

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 The Dividend-Discount Model

Limitations of Dividend Discount Models

It is very difficult to accurately forecast future dividends, future

dividend growth rates, future EPS, future payout ratio etc.

This is because dividend and repurchase decisions involve

management’s discretion.

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 Total Payout and Free Cash Flow Valuation Models

Table of Contents

1 The Dividend-Discount Model

2 Total Payout and Free Cash Flow Valuation Models

3 Valuation Based on Comparable Firms

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 Total Payout and Free Cash Flow Valuation Models

Total Payout and Free Cash Flow Valuation Models

There are two such models relevant to us:

The Total Payout Model

The Discounted Free Cash Flow Model

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 Total Payout and Free Cash Flow Valuation Models

The Total Payout Model

In the DDM, we had assumed that the number of shares remains

constant.

What if the firm has repurchased shares?

Then, two things happen: 1. The number of shares outstanding

changes and 2. equity investors get a second source of payoffs apart
from dividends.

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 Total Payout and Free Cash Flow Valuation Models

The Total Payout Model

In the DDM, P0 = PV (Future dividends per share).

In the Total Payout Model, we value all the firm’s equity and not a
single share.

PV(Future Total Dividends plus Share Repurchases)

P0 = (20)
Shares Outstanding0

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 Total Payout and Free Cash Flow Valuation Models

Valuation with Share Repurchases

Titan Industries has 217 million shares outstanding and expects earn-
ings at the end of this year of $ 860 million. Titan plans to pay out
50% of its earnings in total, paying 30% as a dividend and using
20% to repurchase shares. If Titan’s earnings are expected to grow
by 7.5% per year and these payout rates remain constant, determine
Titan’s share price assuming an equity cost of capital of 10%.

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 Total Payout and Free Cash Flow Valuation Models

Valuation with Share Repurchases

Total payouts for Titan at the end of this year will include both
dividends and share repurchase payments.

Total payouts at end of this year

= 50% × $860million = $430million.
$430million
PV (TotalPayouts) = 0.1−0.075 = $17.2billion.

This value represents the total value of Titan’s equity (i.e.,

market capitalization)
$17.2billion
Per share price, P0 = 217million = $79.26 per share.

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 Total Payout and Free Cash Flow Valuation Models

The Discounted Free Cash Flow Model

In the Total Payout Model, we had valued the firm’s equity.

This was done by discounting the cash flows to equity shareholders

(dividends + share repurchase flows) by the equity cost of capital.

In the DFCF model, we value the entire firm by discounting the cash
flows available (i.e., free) to be paid to both equity and debt
holders by the Weighted Average Cost of Capital (WACC) for the
firm.

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 Total Payout and Free Cash Flow Valuation Models

The Discounted Free Cash Flow Model

Enterprise Value: The enterprise value of any business is the cost of

acquiring all the equity, paying off all the firm’s debt, and thus acquiring a
debt-free (“unlevered”) business.

Enterprise Value = Market Value of Equity + Debt - Cash (21)

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 Total Payout and Free Cash Flow Valuation Models

The Discounted Free Cash Flow Model

Free Cash Flow to the Firm: This is the amount of cash left over
with the business that can be used to pay both its lenders and its
equity holders.

Free Cash Flow = EBIT × (1 − τc )

+ Depreciation
− Capital Expenditures
− Increases in Net Working Capital (22)

Here, EBIT × (1 − τc ) = Unlevered Net Income.

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 Total Payout and Free Cash Flow Valuation Models

The Discounted Free Cash Flow Model

Now,

Net Investment = Capital Expenditures - Depreciation (23)

With this, the previous equation becomes:

Free Cash Flow = EBIT × (1 − τc )

− Net Investment
− Increases in Net Working Capital (24)

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 Total Payout and Free Cash Flow Valuation Models

The Discounted Free Cash Flow Model

Now, present value of the free cash flows to the firm, the enterprise
value:
V0 = PV (Future Free Cash Flow to the Firm) (25)

If the number of outstanding shares is N0 , then the share price:

V0 + Cash0 − Debt0
P0 = (26)
N0

, Here, the numerator on the right hand side gives the value of equity
of the firm.

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 Total Payout and Free Cash Flow Valuation Models

The Discounted Free Cash Flow Model

To calculate V0 :
FCF1 FCF2 FCFN + VN
V0 = + 2
+ ... + (27)
1 + rwacc (1 + rwacc ) (1 + rwacc )N

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 Total Payout and Free Cash Flow Valuation Models

The Discounted Free Cash Flow Model

Often, the terminal value, VN , is estimated by assuming a constant

long-run growth rate, gFCF for the free cash flows beyond year N.
FCFN+1  1+g
FCF

VN = = × FCFN (28)
rwacc − gFCF rwacc − gFCF

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 Total Payout and Free Cash Flow Valuation Models

Valuing a Firm using the Free Cash Flow Model

Kenneth Cole (KCP) had sales of $ 518 million in 2005. Suppose

you expect its sales to grow at a 9% rate in 2006 but that this
growth rate will slow by 1% per year to a long-run growth rate for
the apparel industry of 4% by 2011. Based on KCP’s past profitability
and investment needs, you expect EBIT to be 9% of sales, increases in
net working capital requirements to be 10% of any increases in sales,
and net investment (capital expenditures in excess of depreciation)
to be 8% of any increase in sales. If KCP has $ 100 million in cash,
$ 3 million in debt, 21 million shares outstanding, a tax rate of 37%
and a weighted average cost of capital of 11%, what is your estimate
of the value of KCP’s stock in early 2006?

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 Total Payout and Free Cash Flow Valuation Models

Valuing a Firm using the Free Cash Flow Model

Free Cash Flow Estimates for KCP:

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 Total Payout and Free Cash Flow Valuation Models

Valuing a Firm using the Free Cash Flow Model

Post 2011, expected growth rate in FCF is 4%.

So, Terminal Enterprise Value,
 1+g 
FCF
V2011 = × FCF2011
rwacc − gFCF
 1 + 0.04 
= × 37.6
0.11 − 0.04
= $558.6million.

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 Total Payout and Free Cash Flow Valuation Models

Valuing a Firm using the Free Cash Flow Model

So, KCP’s current enterprise value,

23.6 26.4 29.3 32.2 35.0 37.6 + 558.6
V2005 = + + + + +
1.11 1.112 1.113 1.114 1.115 1.116
= $424.8million.

$424.8+100−3
So, per share price today, P2005 = 21million = $24.85

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 Total Payout and Free Cash Flow Valuation Models

Sensitivity Analysis for Stock Valuation

In the above example of Kenneth Cole, revenue growth in 2006

was supposed to be 9%, slowing down to 4% beyond 2011. If the
expected revenue growth changed to 4% 2006 onward, how would
the estimate of the current KCP stock price change?

If, in addition, EBIT was to be 7% of sales instead of 9%, how would

the stock price change?

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 Total Payout and Free Cash Flow Valuation Models

Sensitivity Analysis for Stock Valuation

A higher initial revenue growth of 9% against 4% contributes about $2 to KCP’s share

price.
Maintaining an EBIT margin of 9% versus 7% contributes more than 4.5$ to KCP’s share
price.

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 Valuation Based on Comparable Firms

Table of Contents

1 The Dividend-Discount Model

2 Total Payout and Free Cash Flow Valuation Models

3 Valuation Based on Comparable Firms

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 Valuation Based on Comparable Firms

The Method of Comparables

The law of one price implies that the price of a stock is the present
value of the expected future cash flows that it will provide to its
owner.

Another application of the law of One Price is the method of

comparables.

Here we estimate the value of a firm based on the values of other

comparable firms or investment, which are expected to generate very
similar cash flows in the future.

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 Valuation Based on Comparable Firms

The Method of Comparables

But identical companies do not exist and there will be differences

even between firms in the same industry selling the same products,
mainly due to size and scale.

We adjust for scale differences between firms by expressing their

values in terms of valuation multiples.

A valuation multiple is the ratio of the firm’s value to some measure

of its scale.

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 Valuation Based on Comparable Firms

The Price - Earnings Ratio

A firm’s P- E ratio is equal to the share price divided by its earnings

per share.

When we buy shares, we are buying the right to the firm’s future
earnings.

Firms with a larger scale of earnings are more likely to earn more in
the future too and so we should be willing to pay more for each right
to those earnings.

So, we value a share of the firm by multiplying its current EPS by the
P- E ratio of comparable firms.

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 Valuation Based on Comparable Firms

The Price - Earnings Ratio

Depending on whether we use earnings of the past 12 months of the

expected earnings over the next 12 months, we can compute
respectively, a trailing P- E ratio or a forward P- E ratio.

That is,
P0
Forward P/E = (29)
EPS1
and
P0
Trailing P/E = (30)
EPS0
Since we are more concerned about future earnings, we prefer the
forward ratio for valuation purposes.

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 Valuation Based on Comparable Firms

The Price - Earnings Ratio

The above formulas can be written in terms of payout rates. For

example
P0
Forward P/E = (31)
EPS1
Div1 /(rE − g )
= (32)
EPS1
Dividend Payout Ratio
= (33)
rE − g

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 Valuation Based on Comparable Firms

The Price - Earnings Ratio

If we assume that EPS grows at a rate g0 between dates 0 and 1, we

have
P0
Trailing P/E = (34)
EPS0
P0
= (35)
EPS1 /(1 + g0 )
(1 + g0 )P0
= (36)
EPS1
= (1 + g0 )(Forward P/E) (37)

So, for growing firms, trailing multiples tend to be higher. This means
that we should be consistent in our choice of multiple type.

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 Valuation Based on Comparable Firms

Valuing a firm using the Price - Earnings Ratio

Suppose furniture manufacturer Herman Miller, Inc., has earings per

share of $1.38. If the average P/E of comparable furniture stocks is
21.3, estimate a value for Herman Miller using the P/E as a valuation
multiple. What are the assumptions underlying this estimate?

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 Valuation Based on Comparable Firms

Valuing a firm using the Price - Earnings Ratio

(P0 )HermanMiller = (P/E )HermanMiller × (EPS)HermanMiller

≈ (P/E )ComparableFirms × (EPS)HermanMiller
= 21.3 × $1.38
= $29.39.

Assumptions underlying the above method: Herman Miller has sim-

ilar Dividend Payout rate, similar rE (i,e., similar risk) and similar g
to comparable firms in the industry.

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 Valuation Based on Comparable Firms

Enterprise Value Multiples

If we want to compare firms with different amounts of leverage (i.e.,

debt), we may use valuation multiples based on enterprise value.

This is because we know that enterprise value represent the total value
of the firm’s underlying business and not just the value of its equity.

A commonly used such multiple is the enterprise value to EBITDA

V0
multiple: EBITDA1
.

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 Valuation Based on Comparable Firms

Enterprise Value Multiples

Assuming constant rate of growth of free cash flow, we may write

V0 FCF1 /EBITDA1
= (38)
EBITDA1 (rwacc − gFCF )

This multiple is higher for firms with high growth rates and low
capital requirements (i.e., where free cash flow is larger in proportion
to EBITDA).

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 Valuation Based on Comparable Firms

Valuing a Firm using an Enterprise Value Multiple

Suppose Rocky Shoes and Boots (RCKY) has earnings per share
of $2.30 and EBITDA of $30.7 million. RCKY also has 5.4 million
shares outstanding and debt of $125 million (net of cash). You believe
Deckers Outdoor Corporation is comparable to RCKY in terms of its
underlying business, but Deckers has no debt. If Deckers has a P/E
of 13.3 and an enterprise value to EBITDA multiple of 7.4, estimate
the value of RCKY’s shares using both multiples. Which estimate is
likely to be more accurate?

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 Valuation Based on Comparable Firms

Valuing a Firm using an Enterprise Value Multiple

Since RCKY and Deckers are comparable firms, we may use

(P/E )Deckers for (P/E )RCKY

So,

(P0 )RCKY = (P/E )RCKY × (EPS)RCKY

≈ (P/E )Deckers × (EPS)RCKY
= 13.3 × $2.30
= $30.59.

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 Valuation Based on Comparable Firms

Valuing a Firm using an Enterprise Value Multiple

Again,
 since
 RCKY and
 Deckers
 are comparable firms, we may use
V0 V0
EBITDA
for EBITDA
.
Deckers RCKY

So,
 V0 
(V0 )RCKY = × (EBITDA)RCKY
EBITDA RCKY
 V 
0
≈ × (EBITDA)RCKY
EBITDA Deckers
= 7.4 × $30.7
= $227.2million.

This gives share price for RCKY as

[(V0 )RCKY − DebtRCKY ]

(P0 )RCKY =
nRCKY
$227.2million − $125million
=
5.4million
= $18.93.

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 Valuation Based on Comparable Firms

Valuing a Firm using an Enterprise Value Multiple

So the P/E multiple method gives us a per share price

estimate for RCKY of $ 30.59 whereas the Enterprise Value
multiple method gives the value to be $ 18.93.

Since the two firms have a large difference in their debt levels,
so it is the enterprise value multiple (which values debt also) is
expected to be the more reliable estimate of RCKY’s share
price.

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 Valuation Based on Comparable Firms

Other commonly used multiples

Instead of P-E ratio we may use price to book value per share ratio
(P-B).

Book value is the value of shareholders’ equity in the balance sheet.

Just like P-E, P-B may also be forward or trailing.

Since usually, book value is not a negative number, it can be used for
companies with negative earnings.

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 Valuation Based on Comparable Firms

Other commonly used multiples

Another multiple that can be used for firms with negative earnings is
the price to per share sales (P-S) ratio.

Also used sometimes is the ratio of P-E to expected earnings growth

rate.

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