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Sunday April 12, 2020
The price-earnings ratio is possibly the most widely used indicator to value stocks. But it no longer works in the Corona crisis. The same applies to dividend yield. Other metrics are more useful.
Stockbrokers are always considered to look ahead. In normal times this makes sense. The P / E ratio is calculated on the expected earnings per share by which the share price is divided. The basis now would be the profit that can be expected for the current or next fiscal year.
However, no one and no stock analyst currently knows how long the economic shutdown will take and what consequences this will have for companies. In this environment, earnings estimates are like playing a dice. The company’s analyst estimates don’t help here either. Experience has shown that they generally adapt their forecasts to the environment with a longer time delay.
Look back
In this completely uncertain environment, it makes more sense to trust the facts – that is, to use a company’s earnings in the past to calculate the P / E ratio. To eliminate outliers up or down, it makes sense to use earnings. of several years. For example, the investor may value a share based on the earnings of the last ten years. This gives you an idea of how much a company earns on average in normal years.
Take Daimler, for example: in the last ten years, the Group has achieved earnings per share between EUR 2.22 in 2019 and EUR 9.61 in 2017. Average earnings per share in Daimler from 2010 to 2019 were EUR 6.30. With a current exchange rate of 28.64 euros, the average P / E ratio is 4.5. This is true even for generally low-value and low-cost auto stocks. The so-called Shiller P / E, developed by US Nobel Prize winner Robert Shiller, also uses the earnings of the past ten years, that is, those adjusted for inflation. However, this is usually not so easy to calculate for small investors.
Dividend yield with question mark
Another popular and often used indicator is dividend yield, that is, earnings per share that are distributed. However, this year in no way is it said that the originally announced dividends will actually be paid. Aircraft engine maker MTU has already announced that it will reduce distribution by 3.40 per share. After all, MTU is a Dax value. British competitor Rolls-Royce has already followed this example, as has the fashion group Hugo Boss.
It is understandable that companies, if they do not produce or sell products, first keep their money together. Public pressure is also expected to increase. It is not understandable that companies receiving short-term labor benefits from the state also distribute billions of euros to their shareholders. All three companies mentioned could be followed by further cuts or cuts in dividends.
Good alternatives
The price book value ratio (KBV) and the capital ratio are probably more suitable for the current valuation of the shares. The KBV relates the market capitalization, that is, the market value, to the net worth. To follow Daimler’s example: the company is currently valued on the stock exchange at 30,500 million euros. This was offset by an equity of 62.8 billion euros as of December 31, 2019. Currently, the company is valued at just under half of what actually belongs to the shareholders. The KBV is 0.49. In general, the lower the KBV, the cheaper the stock is.
Also, the equity index provides a good indication of how stable a balance sheet is. It indicates how much of the total assets, that is, the total capital of a company, is attributable to the shareholders, that is, to the owners. The lower it is, the better. As a general rule, companies with a capital ratio of more than 30 percent are considered solidly funded. At a lower value, they carry (also) high debts. At Daimler, the capital ratio has fallen from 26.5 percent to just 20.5 percent in the past ten years.
Also, in times of partially complete production stops, it pays to take a look at liquidity, i.e. the amount of cash. The quantity at least gives an idea of how long a company can last without production and without government help. Daimler had a cash portfolio of € 18.9 billion at the end of 2019.
In general, the more key figures an investor uses, the better he can estimate the value of a stock. This applies even more to the crazy prices that we are currently experiencing in the stock markets.
About the author: Wolfgang Böhm works as a freelance finance and business journalist in Berlin.
