19-Ratio Analysis and Quant

# 19-Ratio Analysis and Quant - Ratio Analysis and...

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Ratio Analysis and Quantitative Analysis

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Ratio Analysis Pick your favorite accounting ratio. Compare accounting ratios for two similar firms. If they are different, think hard about why the two firms maybe should have different accounting ratios. If you can’t think of a reason why the two ratios should be different, then you’ve found a trading opportunity.
PE Ratios P/E ratio = P 0 /E 0 Assume earnings growth is constant Stocks can be valued using Gordon Growth Prices are in equilibrium ) ( ) 1 ( 0 0 0 0 R R g k E g D E P - + =

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PE Ratios Compare PE ratios for two firms that are in the same industry. PE ratio for firm A: 2.50 PE ratio for firm B: 3.33 Are shares of firm A under-valued?
PE Ratios The PE ratio increases as g increases. The PE ratio decreases as k increases. Growth Stocks: Stocks with high PE ratios Value Stocks: Stocks with low PE ratios ) ( ) 1 ( 0 0 0 0 0 0 R R g k E g D E P - + =

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PE Ratios Suppose both firms have same k=.12 Both firms just paid a dividend that was 20% of earnings.
PE ratios Assume the dividends of both firms are expected to grow at a constant rate forever. Back out implied dividend growth rates: A: B: A’s implied dividend growth rate is almost half of B’s. Is this reasonable? If not, than A is undervalued. 04 . ) 12 (. ) 1 ( 20 . ) ( ) 1 ( 5 . 2 0 0 = - + = - + = g g g g k E g D 06 . ) 12 (. ) 1 ( 20 . ) ( ) 1 ( 33 . 3 0 0 = - + = - + = g g g g k E g D

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PE Ratios The objective of PE ratio analysis is to find stocks you believe have high growth opportunities with relatively low PE ratios. These are “Neglected” stocks that should earn
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19-Ratio Analysis and Quant - Ratio Analysis and...

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