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Price Earning Ratio


The comparison and interpretation of the price earnings ratios for South West and South Staffs are shown as follows:

Yield

P/E ratio = Price per share / Earnings per share

Hence, earnings per share

= Price per share / P/E

Dividend yield = Dividend per share / Price per share

Hence, dividend per share

= Price per share x Dividend Yield

Payout ratio = Yield x P/E

 

South West

South Staffs

 

Earnings per share

(pence)

Dividend per share

(pence)

Payout ratio

(%)

Earnings per share

(pence)

Dividend per share

(pence)

Payout ratio

(%)

1996

71.86

35.21

49.00

172.30

91.01

52.82

1995

67.33

32.83

48.75

165.09

68.94

41.76

1994

61.72

30.55

49.50

140.71

60.42

42.94

1993

66.15

28.90

43.68

154.88

53.34

34.44

1992

66.30 

26.49

39.96

102.99

14.49

14.07

For South West, it had a higher yield of 7.4% in 1992 (the dividend is 7.4% of the share price of 358 pence), or a dividend of 26.49 pence per share.  This has been diminishing in 1993-1995 but picked up in 1996 with a yield of 7% (the dividend is 7% of the share price of 503 pence), or a dividend of 35.21 pence per share (+ 32.9% compared to 1992).  For year 1996, the dividend of 35.21 pence per share on earnings per share of 71.86 is a dividend payout percentage of 49%.  

For South Staffs, there are significant variations for the dividend per share mainly due to the sharp increase of share price (+ 247%) and yield (+ 80%) from 1992 to 1996.  In 1996, it has a yield of 3.8% (the dividend is 3.8% of the share price of 2395 pence), or a dividend of 91.01 pence per share (+ 528% comparing with 1992).  For year 1996, the dividend of 91.01 pence per share on earnings per share of 172.30 is a dividend payout percentage of 52.82%.  

Therefore, although South Staffs have a lower yield percentage, their dividend per share and earnings per share have a profound increase compared with South West.  The payout ratio of South Staffs has been increasing significantly from 1992 to 1996, which means that less profit is retained in the business to fund future expansion.  However, the payout ratios for both companies are still within the average percentage.

Earnings

Market capitalisation = Price per share x Number of shares on issue

Hence, total number of shares

= Market capitalisation / Price per share

P/E ratio = Market capitalisation / Total earnings

Hence, total earnings

= Market capitalisation / P/E ratio

Total dividends = Dividend per share x Total number of shares 

Total retained profits =Total earnings íV Total dividends

 

South West
South Staffs

 

Total number of shares

Total earnings

(million)

Total dividends

(million)

Total retained profits

(million)

Total number of shares

Total earnings

(million)

Total dividends

(million)

Total retained profits

(million)

1996

127,196,819

91.40

44.79

46.61

5,899,791

10.17

5.37

4.80

1995

126,000,000

84.84

41.37

43.47

5,801,567

9.58

4.00

5.58

1994

125,302,782

77.33

38.28

39.05

5,597,484

7.88

3.38

4.50

1993

123,798,450

81.90

35.78

46.12

5,401,575

8.37

2.88

5.49

1992

123,575,419

81.93

32.74

49.19

5,376,812

5.54

0.78

4.76

For South West, the total number of shares has been increased by 2.9%, while total earnings have been increased by 11.6%, from 1992 to 1996.  South Staffs has a more significant increase compared with South West.  For South Staffs, the total number of shares has been increased by 9.7%, while total earnings have been increased by 83.6%, from 1992 to 1996.  It is because South Staffs had more retained profit in 1992-1995 to fund for expansion so higher growth should be expected.  The total earnings of South West is much higher than South Staffs due to the number of shares (South West is 21 times of South Staffs).

P/E ratio

High price earnings ratio = High price per share / Earnings per share

Low price earning ratio = Low price per share / Earnings per share

 

South West
South Staffs

 

High price ratio

Low price ratio

High price ratio

Low price ratio

1996

7.72

6.39

13.93

11.61

1995

10.03

6.82

11.66

9.24

1994

10.94

7.53

11.41

8.71

1993

7.92

4.63

9.68

4.33

1992

5.93

4.56

6.80

6.07

For South West, they had a lowest P/E ratio (5.4 times) in 1992 and highest (9.9 times) in 1994.  In 1996, the P/E ratio indicates that it would take 7 years of 71.86 pence per year earnings to pay back the initial 503 pence share cost.  They have a large range in the share prices in 1993-1995 but more stable in 1996 with range difference 1.33 times from high and low price ratio.

For South Staffs, they had a lowest P/E ratio (6.7 times) in 1992 and has increased significantly to 13.9 times in 1996.  In 1996, it indicates that it would take 13.9 years of 172.30 pence per year earnings to pay back the initial 2395 pence share cost.  Except 1992, they have a large range in the share prices (2.3 íV 5.3 times) in other years.  Therefore, the present of earnings of South Staffs is expected to increase faster than South West.  It is because the higher the growth, the higher the PE.

Price earnings relative

PE ratio = Market PE x Sector-Market Relative x Firm Sector Relative

 

 

 

South West
South Staffs

 

Market PE

Sector-Market Relative

Firm-Sector Relative

PE Ratio

Firm-Sector Relative

PE Ratio

1996

16.74

0.49

0.85

6.97

1.68

13.78

1995

16.62

0.48

0.95

7.58

1.47

11.73

1994

24.89

0.39

1.02

9.90

1.16

11.26

1993

20.16

0.41

0.95

7.85

0.99

8.18

1992

14.66

0.42

0.87

5.36

1.08

6.65

The highest market PE was in 1994 with 24.89 times but has significant decreased to 16.74 times in 1996.  It indicates that every £1 earned by the average listed company was worth 16.74 pence in share value.  In contrast, the sector market relative in 1994 was the lowest (0.39 times) but it is the highest in 1996 with 0.49 times.  The sector market relative means that the stock market is willing to pay 0.49 times more for £1 earned in the water supply sector than for £1 earned in the average business.

For South West, their firm sector relative was rated above average in the sector 1994 with 1.02 times.  However for year 1996, the stock market is only willing to pay 85% for £1 earnings in South West.  In contrast to South Staffs, their firm sector relative is rated above average in the sector for all years except 1993.  The reasons might be as following:

  1. Quality of earnings íV the more sustainable the EPS, the higher the PE

It could be that the earnings per share of South West have some non-sustainable profit, while South Staffs has sustainable EPS. 

  1. Growth prospects íV the higher the growth, the higher the PE

Perhaps the stock market does not believe that South West investment opportunities are as attractive as South Staffs and the average water industry, or South West is perceived with organisational constraint on profitable growth. 

  1. Risk íV the more the risk, the lower the PE

South West might have a higher operational gearing (risky) than South Staffs and average gearing ratio.


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