Is our market PER correct ?

opfdo · 1 Is our market PER correct ? Fri Jan 20, 2012 8:52 pm

opfdo

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as at today it shows 15.1. Is it correct?
(www.cse.lk)

Antonym · 2 Re: Is our market PER correct ? Fri Jan 20, 2012 9:49 pm

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Market PER of 15.1x as per the CSE website is the trailing ratio.
It takes into consideration each company's audited financial statements contained in the Annual Reports released.

The CSE ratio is not updated with the unaudited interim results released after that. If these are included, the PE ratio would be about 12.7x.

soileconomy · 3 Re: Is our market PER correct ? Fri Jan 20, 2012 9:57 pm

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Antonym wrote:Market PER of 15.1x as per the CSE website is the trailing ratio.
It takes into consideration each company's audited financial statements contained in the Annual Reports released.

The CSE ratio is not updated with the unaudited interim results released after that. If these are included, the PE ratio would be about 12.7x.

.

It is a very reasonable ratio.agreed with you.

lokuayya · 4 Re: Is our market PER correct ? Sat Jan 21, 2012 10:39 am

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As I remember, Bloomberg mobile financial web the PE ratio was 12.8 two three days ago.This may further drop with new financial reports.

Antonym · 5 Re: Is our market PER correct ? Sun Jan 22, 2012 7:52 pm

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lokuayya wrote:As I remember, Bloomberg mobile financial web the PE ratio was 12.8 two three days ago.This may further drop with new financial reports.

Thanks, lokuayya. Here's some comparitive data on the subject:
As per Bloomberg, emerging markets (forecast to grow at 5.4% during 2012) are now valued at 10 times estimated earnings.
Stocks in developed countries (forecast to grow at 1.4%) trade at a multiple of 12 times estimated earnings.

Sri Lanka is forecast to grow at 6.8% during 2012. So, is the premium justified?

http://www.bloomberg.com/news/2012-01-20/emerging-stocks-advance-set-for-biggest-weekly-gain-in-almost-two-months.html

All growth forecasts are from The World Bank report of January 2012.

Academic · 6 Re: Is our market PER correct ? Sun Jan 22, 2012 10:00 pm

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If Trailing PE is 15 and economy grew by 8% from 31.3.2010 to 31.12.2011. Assuming listed companies also had the same average growth and 7% as expected growth for one year from 1.1.2012, forward PE of CSE is given by (assuming trailing PE is based on March end data, which is not 100% correct as we have December companies)

15/((1.08)^0.75)/(1.07)=13.23

Antonym · 7 Re: Is our market PER correct ? Mon Jan 23, 2012 12:14 am

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@Academic: Good attempt. But typically, due to economies of scale, when turnover grows by x%, profits should grow at a higher percentage.

I expect that profits of CSE listed companies will grow by a minimum of 18%. Results for Dec-11 and Mar-12 companies will hopefully confirm this. Let's wait and see...

Academic · 8 Re: Is our market PER correct ? Mon Jan 23, 2012 8:26 pm

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Antonym wrote:@Academic: Good attempt. But typically, due to economies of scale, when turnover grows by x%, profits should grow at a higher percentage.

I expect that profits of CSE listed companies will grow by a minimum of 18%. Results for Dec-11 and Mar-12 companies will hopefully confirm this. Let's wait and see...

Two points

Note that any growth due to economies of scale is not sustainable. Once businesses reached optimum level, negative economies of scale would decrease profit. Thus any profit growth due to just economies of scale is not sustainable. In other words, sustainable growth rate relates to capacity development in the economy.
In calculating justified PE ratio, (1-b)/(r-g), we have to use sustainable growth rate. Any investment decision based on extrapolation of short-term profit growth would be myopic.