Cash Flow PER Multiplier

The most important ratio that you can calculate by taking the quotation as base, is the ratio of price – earnings or per (price earnings ratio). The per is calculated by dividing the quotation by the earnings per share:

  Per  =   share's quotation
              earnings per share

When the per is very high it indicates that the share is possibly over the value and that the quotation will have difficulties to rise, because the market will be paying too much for each money unit of the earnings obtained by the company. And, on the contrary, if the per is low it indicates that the quotation of the share might rise more easily. The adequate value of the per depends above all in the type of interests on the market, due that the per gives the pattern about the minimum profit that the shareholder wants due that the per is the opposite of profit:

 Profitability  =     earnings per share     =   1
     Quotation of the share  per

A desired profitability of 5% a year, would mean that the per offered would be of:

 Per  =    1   =  20
            0.05

Due that a company that has a per of 20 means that the earnings that it generates supposes a profitability above the quotation of 5%. If the profitability desired by the investor is of a per of 40; for example, it will mean that the profitability will be of 2.5% and in this case the share will be too expensive. Said in other words, the price of the share is too high for the profit that it generates. That is, if the shareholder wants a profitability of 5%. So if the shareholders wants a profitability of 5% a share will begin to be expensive when its per is higher to a value of 20.

However, if the desired profitability the shareholder is of 10%, the maximum per should be of 10. A share with a per of 10 will begin to vbe expensive when:

 Per  =   1    =  10
           0.10

To value the per of a company it would be useful to compare it with the per of other companies in the same sector  In the measure in which the per of a company is lower than that of other companies of the same sector it will be a sign that the price of the share of the analyzed company is cheap. If on the contrary, the per of the analyzed company is higher than that of other companies in the same sector it could be a sign that the share of that company is expensive.

The multiplier of the cash flow is very similar to the per and it is obtained by dividing the quotation of the share by the cash flow of the share:

 Cash flow multiplier  =  quotation of share
                                     cash flow per share

The same as with the per, the lower its value the cheaper will the corresponding share be.

As a conclusion for all the exposed ratios, we could affirm that a share will be cheap and by it, worth buying when:

• the quotation of the share is not very much higher than that in the site value of the same
• the earnings per share, the cash flow per share and the dividends per share are high
• the per is low or lower than the average of other share of the same sector

Beginner Money Investing Analysis of Stock Exchange Ratios Company Growth Share Value Economic Value of a Share Formula Book Value of a Share Real Value of a Share Economic Value of a Share Market Price of Share Per Share Ratio Results Cash Flow PER & Multiplier The Beta Risk Factor