The economy has become an indispensable material in the world market. Despite the fact that it may seem incomprehensible to those who are not engaged in it, it does not only make part of the industrial world, but also the political world itself. YPEG allows us, among other things, to assess whether the company’s shares are overbought or oversold. Today in particular we will focus on the market multiples. These variables are widely used in finance to assess the value of companies and compare them. Of course, if you need to take an examination of economy, we suggest that you resort to the text recommended by the teacher, as this guide aims to give a simple definition of the topic.
The analysis of the value of a business is mostly done using two methods, the financial and market. While the financial methods tend to use almost exclusively internal data of the enterprise, market methods use variables designed to compare the similar undertakings, or comparable, in the same sector. In the market multiples, among which we find the Year forward P / E to growth ratio, are the values used for this purpose.
The multiple “Year forward P / E to growth ratio”, usually referred to by the acronym “YPEG”, is one of the best-known market multiples; this measure is a ratio: the numerator is another multiple of the market, the Price Earnings (“P / E”) where price refers to the price of a share of the company, while earnings refers to ‘earnings per share. In the denominator we find the average rate of growth in relation to a period of two or three years. The YPEG differs from the multiple “PEG” by denominator, which in the case of the latter is an average rate over a longer period.
The YPEG is widely used to assess whether a company is undervalued or overvalued by the market. In fact, we understand (remembering that the price is a function of questions and supply) if the shares of a company are overbought or oversold.
Usually a YPEG equal to 1 expresses a fair value of the share price and thus a fair assessment of the company by the market. A YPEG greater than 1 expresses an overestimation or an excessive purchase of shares and, conversely, a lower YPEG one expresses an underestimation of the company.
Calculating the multiple price-earnings
As we have learnt from the above, the market multiples are particular indicators that express the relationships between market values and special items. These variables allow you to compare companies, evaluate them and obtain important information about the organization’s finances. They are therefore routinely used by the company’s management to obtain information on their company. One of the implemented market multiples simpler to calculate is the ratio Price / Earnings (or the multiple Price / Earnings). This guide will explain how to do it. Let’s start!
Multiple Market Price-Earnings is one of the most used variables, it is usually indicated by the initials “EP” or “P / E”. This variable suggests the value of the relationship between the current price of a stock and the expected return on the share itself. As for the “current price” which refers to the value at the time of calculation of the indicator and, in general, it is chosen between the values given by the exchange of reference (in the US, NYSE). Furthermore, for the calculation, it is assumed that the gain is equal to the dividends paid per share and that these are constant for the forecast period.
Usually this multiple has a value between 13 and 15. If the ratio is greater (for example 30) it is assumed that the action is overvalued, or that the price is greater than the actual value of the title, and vice versa it will be underestimated when the report is less than 13 (e.g. 9). In fact, it is an optimal value because it depends on the reference sector of the company that you’re considering. We can say that in more mature industries, in general, we find P / E lower than the average, while the most innovative sectors are characterized by upward movement of their Price / Earnings values. When calculating this indicator, it is important to keep the average reference value of the industry, to measure any significant changes in terms of over / undervaluation.