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Hills Industries: Company Valuation using Price-Earnings Ratio and Price-Book Value Ratio

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Company Valuation - as part of a project, I am required to provide a financial Valuation of a Company using the valuation methods below. This is an Australian Company "Hills Industries" and full details can be found at

? The working out for each valuation methods below and answers with calculations behind each valuation method. (if possible in a excel file so that I can review the method used) Plus a brief explanation of each method and results (so that I can them review the method and understand then and to expand and write a full report)

The only information given is the excel file attached hills.xls and suggested viewing of the annual reports for 2004 and/or 2003... also attached.

Using Relative Valuation techniques:

A. Price-Earnings Ratio (P/E) + explanation
B. Price-Book Value Ratio (P/BV) + explanation

Note A: How to apply a P/E valuation technique?

First you look for the current stock price of the stock

Next you compute the expected Earnings-Per-Share (EPS):
Expected EPS = Current EPS x (1 + growth rate)

Third, you divide the current price by the expected EPS to get a P/E multiple.

Fourth, you compute the P/E of the industry by taking the average P/E of several large competitors.

Lastly, you compare your stock's P/E with the industry's average P/E, if your stock's P/E is lower than the industry's average P/E, your stock is considered "undervalue".

Note B: How to apply a P/BV valuation model?

Refer to Note A: almost identical process as the P/E model.


Solution Preview

Year 2004 2005 growth rate Expected EPS P/E
Earings per share in cts 22.5 23.5 0.044444 24.54444 0.196786
Expected BPS P/B
Book value per share 19.98 9.81 -0.50901 4.816622 1.002778

Year 2004 2005 growth rate Expected EPS P/E
Earnings per share 1.51 0.69 -0.54305 0.315298 114.0191
Book value per share 3.02 2.37 -0.21523 1.859901 19.32899

Year 0.01 -0.02 -3 0.04 421.25
Book value per share 1.37 1.2 -0.12409 1.051095 16.0309

The workings of these are shown in the excel sheet. The prices of these companies are the current prices and have been taken from common financial websites.

Please note that according to the analysis requested by question, as the P/E and P/B ratio is lower than the P/E and P/B ratio of 'competitors' then Hills Industries is an undervalued share. A naà¯ve investor may go ahead and actually invest in the company. Another investor would like to investigate and find out why the share of this company is so undervalued.

A. Price-Earnings Ratio (P/E) + explanation - (approx 300 word)
P/E ratio is used as a measurement of the relative cost of the stock. The P/E ratio is equal to a stock's market capitalization divided by its after-tax earnings over a 12-month period. Whether the calculating for the whole company or a per-share basis, the value is the same.With a high P/E ratio, the market is more willing to pay for each dollar of annual earnings.
Previous year's price/earnings ratio are considered actual (using a historical price), current/next year price/earnings ratio would be estimates. In either case,' P ' is equal to the current price. Companies that are not currently profitable (negative earnings) do not have P/E ratio's.
When comparing acompany's P/E, one should look at comparing the ratio against similar companies. Different industries and even different companies have different P/E ratio's. Technology companies typically have above market P/E ratio's (approx double the average market P/E), while banks have typically have below market P/E ratios.
A P/E of ...

Solution Summary

With comparisons to two other company, the Excel solution displays the formulas and calculations to arrive good data for comparison.