How To Determine the Valuation of A Company

How To Determine the Valuation of  A Company

This is from Twitter. But Aaron Pressman of Fortune noted as follows

But to get to the $175 billion valuation, you have to assume that investors would value a gadget maker at 17 times its sales or 25 times its profit. Not only would that be far more than Apple itself, which trades for about 4 times its sales or 22 times its profit, but it also ignores the market’s harsh view of a whole host of similar struggling companies. As we’ve said more than a few times around here, hardware is hard.

A long securities filing made public by Fitbit brought the true rejoinder to the AirPods silliness. The proxy form details Google’s $2 billion bid for the company and urges shareholders to vote in favor of the deal. It’s mostly pretty dull reading, but then you get to an eye-opening chart. Fitbit’s investment bankers drew up a list of comparable companies, like GoPro and its action cameras or Sonos with smart speakers, to help decide how much Fitbit might be worth. With only a few exceptions, these companies were trading at a bottom-of-the-barrel valuation of 1 times their sales or less.

Investors don’t dislike independent hardware companies—they hate them. Apple and Garmin are a rare exception. Software and service providers trade at much higher levels: Microsoft sells for almost 8 times its sales, Google for 4 times, and even unloved Uber for almost 3 times. Tragically, many hardware companies were valued for much more when they first went public. Fitbit’s stock price dropped 80% from its IPO before Google swooped in. By then, it was trading for a meager 0.4 times its revenue.

What Is Price-to-Earnings Ratio – P/E Ratio?

The price-to-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its per-share earnings (EPS). The price-to-earnings ratio is also sometimes known as the price multiple or the earnings multiple.

P/E ratios are used by investors and analysts to determine the relative value of a company’s shares in an apples-to-apples comparison. It can also be used to compare a company against its own historical record or to compare aggregate markets against one another or over time.
  • The price-earnings ratio (P/E ratio) relates a company’s share price to its earnings per share.

  • A high P/E ratio could mean that a company’s stock is over-valued, or else that investors are expecting high growth rates in the future.

  • Companies that have no earnings or that are losing money do not have a P/E ratio since there is nothing to put in the denominator.

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