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I work for the internal m&a Dept of a large tech company.
My boss gave me an odd assignment of comparing us vs our competitors using economic profit and explaing why more EP yields higher P/E ratios and what to do to improve it.
So far the data suggests that EP and PE are negatively correlated. ( Small sample size of 5 companies tho)
This is not what he wants to hear and I have to present this to the CFO soon, and this is the narrative my boss has been pushing - I've used price to book and EV/Ebitda multiple and they are all negatively correlated.
What should I do.
Operating invested capital (aka deployed capital no cash no goodwill) * economic spread ( roic - wacc) = EP.
This is on a nongap basis btw
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You're much better off asking this on WSO where people actually know finance and aren't just shills.
Are you looking at historical EP vrs. P/E for each company or single data points?
P/E has many factors so finding a strong correlation seems unlikely.
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>>1366989
EP from FY 2015 and TTM P/E. Yeah wso is the place to go I just think my co-workers might be on there lmao. You are right about shills Just figured I'd add some content.
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>>1367023
1. using a single year will throw it off, some
2. pic related is roic and p/e for about 1500 us companies with an roic above 5%. there is no relationship between the 2.
3. https://doc.research-and-analytics.csfb.com/docView?language=ENG&format=PDF&source_id=em&document_id=805915460&serialid=b3Wu0sLSCMh00cBXg5ql%2fa4nh5XcibIeQg7OZgs4w68%3d
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>>1368106
Thanks for the info.
Roic and P/E numbers only match if you're earning above your cost of capital. Aka if roic is 12 and cost of capital is 9 you have economic profit and the idea is that should yield a higher P/E ratio because investors are getting above risk adjusted return requirements.
I checked my buds CFA book and if says EP doesn't lead to higher valuations. There is a large consulting firm that is mentioning economic profit over and over again but I think it is partially a sales dealio.
Ty for your effort.
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