Chapter 22

A stock market analysis of a firm should be performed after having checked the liquidity of the stock and understood the shareholder base. It is centred on the company’s value, or its stock market performance if listed, which should be compared to the financial performance of the firm, multiples (especially EBITDA, EBIT multiple and P/E), dividends and returns, compared with required returns.

Dividends are analysed by looking at dividend yields (dividend on the share price) and the payout ratio (dividend on net profit).

The P/E (price to earnings) ratio is the ratio of the value of the share to EPS (earnings per share). Changes in P/E follow future EPS growth and move in the opposite direction from interest rates and risk (financial and operational).

It is only when the company pays out all of its profits and when financial and industrial mar- kets are in equilibrium that inverse P/E (also called earnings yield) is equal to shareholders’ required rate of return. Generally, the inverse P/E criterion results in an underestimation of shareholders’ required rate of return.

The EBITDA and EBIT multiples are other valuation multiples, which are computed as enter- prise value (i.e. value of debt and equity) divided by EBITDA or EBIT.

It should be noted that a stock market analysis should be performed only after the market price has been adjusted for certain past transactions (stock split, rights issue); certain future events (conversion of convertible bonds, exercise of warrants or stock options) can also be taken into account.