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EPS methodology valuation approach

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EPS methodology valuation approach

One of the popular valuation approaches involves using multiple of the EPS (earnings per share) methodology. The earnings multiple consists of evaluating the price-to-earnings (P/E) ratio. P/E ratio helps to identify how much shareholders are prepared to pay per dollar of earning.

Besides, a lower P/E signifies a higher EPS, which is a good scenario for investors as it means that for every share they invest in, they will earn a higher profit. The earnings multiple methods consist of one of the fastest ways of examining stock valuation and the most efficient process of evaluating whether a company is paying excessively for a stock (Mayes, 2020). It helps in measuring the financial well-being of a company. It is also used to quantify the growth of the company, its efficiency, and productivity. Essentially, the earnings multiple is calculated by taking the price of the stock and dividing it by EPS.

That is:

Earnings multiple = Stock price / EPS

At the end of Q 6, Carbon’s stock price was $100 while the earning per share was $38

Therefore, the company’s earnings multiple = 100 / 38

= 2.63

An earnings multiple of 2.63 implies that investors are ready to pay a multiple of 2.63 times the current EPS for the Carbon’s common stock. Considerably, Carbon has a low P/E; therefore, it can be deemed to be undervalued. In other words, Carbon’s stock investments are selling at a price that can be presumed to be lower than their true inherent value. Henceforth, if the stockholders would want to sell their stocks, they can do so at a higher value and make extra profit in a future date. Carbon’s stocks have a potential for growth considering the profits and the sales the company is making. Investors, especially value investors, may buy Carbon’s stock now to take advantage of the lesser initial cost and the potential of making greater profits in the future after the stocks have appreciated (Mayes, 2020). Fundamentally, the earnings multiple methods are based on the assumption that similar assets will sell for the same price.


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