A company's fundamental value represents what you are prepared to pay today for its future cash flows. A range of methodologies have been developed in the market to calculate value. They include Discounted Cash Flow (DCF), Price to Sales, Price to Earnings Growth (PEG), and Price to Dividend.

A common denominator used in the market to express value irrespective of the valuation methodology applied is the Price to Earnings Ratio (P/E).

A company’s share market “price” can significantly fluctuate from its “value”. This represents the difference between what people are prepared to pay compared to the company’s fundamental value. Fluctuation ranges from fear (Bear) to greed (Bull).

Fluctuations are expressed quantitatively in a company’s share volatility which is affected both by human emotions and a company’s fundamental characteristics. Companies with predictable earnings and dividend stability such as Banks are typically less volatile than high growth companies which was evident in the exuberance of the dot com bubble.

Market Shares provides a history of company P/E’s, their current P/E and a benchmark to peers and the All Ordinaries (XAO). The history is based on the average P/E for each company’s financial year end. Alternate profiles of the P/E’s may be selected to consider and optimise your view of value ranges.

Values are computed by applying your chosen P/E to a monthly weighted combination of the company’s last financial results and consensus analyst growth forecasts. When earnings are forecast to be less than the prior year then value is based solely on the forecast.

Values are not available:

• For years in which a company made a loss as the P/E ratio cannot be determined; and
• If an analyst growth in earnings forecast is not available. Company analyses are typically weighted to higher capitalised shares and those with substantial institutional share holdings.

The Price/Earnings (PE) Average graph displays:

• The average monthly PE for each of the past 10 years. These are calculated by totalling the average monthly PE for each month within the relevant year and then dividing the total by 12 (an average of the averages), and
• The current PE's for the subject company, the market (XAO) and the relevant industry, which are to the right of the monthly averages.

Analysing this is particularly useful when using the Value Calculator. For example, if a company's PE has experienced significant volatility, the you may wish to select a larger number of years as a period, and 'Smoothed Min' to calculate and consider the lower price fair value range.

The Price Earnings Reference enables you to:

• View any specific year's minimum, maximum and average PE for the subject company for up to the past 10 years; and
• Select 'Smoothed' if you prefer, which will eliminate the highest and lowest of the selected range.

This tool combined with the Price/Earnings (PE) Average graph delivers a thorough appreciation of a company's current and historic PE's. This is essential to maximising the benefits of the Value Calculator.