Valuing a Company

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Valuing a Company

• What determines a companies worth?

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What is company worth?
Company A
Company B
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2 Goals of a Company

• 1) Maximize Profits (each year)
• 2) Grow Profits (over time)

Companies that grow PROFITS the fastest
have the best stock performance
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What is a P.E. ratio?

• Price to Earnings Ratio Price of Stock /
  Earnings per Share
• Stock Price 20 Earnings 2.00 per share
• Price to Earnings Ratio 20/2 10 P.E.

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Growth Rates

• Investors care about how FAST companies can GROW
  profits
• P.E. ratios reflect GROWTH rate expectations
• The HIGHER the P.E. gt the FASTER the market
  expects Profits to Grow

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High Low P.E.s

• SP500 Average 15 P.E.
• Below 10 P.E. gt considered low
• Called a value stock
• Generally, less risky
• Above 35 P.E. gt considered high
• Called a growth stock
• Generally, more risky

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SP500 Average PE 1900-2009 is 15
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Analysis of 2 Companies
About Company
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Analysis of 2 Companies
About Company
Current P.E.
Current Market Cap
Profits per year