EPS P/E Ratio NOPAT MVA EVA Industry average 0.6000 $ 46.25 $ 10,785,000 $ 18,75
ID: 2779870 • Letter: E
Question
EPS
P/E Ratio
NOPAT
MVA
EVA
Industry average
0.6000
$ 46.25
$ 10,785,000
$ 18,750,000
$ (76,965,000)
Competitor 1
0.7500
$ 46.67
$ 10,953,000
$ 4,545,000
$ (93,365,000)
ACME Iron
0.4697
$ 58.55
$ 6,445,200
$ 112,077,000
$ (29,606,000)
With the above information,
Compare and contrast the ratios; what do the ratios convey to the investing public? How would you present these internally and externally? Make recommendations to management from your analysis.
EPS
P/E Ratio
NOPAT
MVA
EVA
Industry average
0.6000
$ 46.25
$ 10,785,000
$ 18,750,000
$ (76,965,000)
Competitor 1
0.7500
$ 46.67
$ 10,953,000
$ 4,545,000
$ (93,365,000)
ACME Iron
0.4697
$ 58.55
$ 6,445,200
$ 112,077,000
$ (29,606,000)
Explanation / Answer
EPS
Earnings Per share for ACME is less than the industry and near competior showing that equity investors get less earnings on each share they have invested in compared to the peers. This could be due to lower profitability parameters which need to given a look in.
P/E Ratio
The lower EPS has translated into a higher P/E though. This could be possible due to either the future outlook for Acme is positive as Price is discounted future earnings and investors are optimistic or it could be because Acme is over valued.Both the industry P/E and competitor P/E hovers around 46 while Acme's is 10 points more despite lower EPS signifying overvaluation.
NOPAT
NOPAT is EBIT(1-t) which is the returns to both capital holders debt and equity. NOPAT in absolute terms for Acme is lesser than industry and competitor. However, we can only take a decision after looking at relative values.
MVA
Market Value added for Acme is much better than industry and competitor suggesting an effective management and robust oprerational efficiency. This also signifies managements commitment to shareholder value. So Acme seems to be creating better value for shareholders despite lower Earnings per share.
EVA
Enterprise Value added is NOPAT over cost of capital and though all parties have negative EVA, Acme has better absolute EVA . So in a way Acme seems to be creating better value to shareholders
Internally, the management can be apprised of negative EVA and that better effective operation parameters to be focused on improving the EVA. The current EPS being lesser than peers need to be stressed upon the management. If the company provides EPS at this rate, very soon the market may start understanding the overvaluation and drub the shares. This could potentially cause decline in MVA and P/E ratios.
Externally, the performance of company providing better value of investors can be stressed upon to evince further interest in company's shares. This could potentially value the company high and further improve the MVA an P/E ratios.
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