Two listed companies have the exact same Financial Statements, yet the P/E Multiple of company A is 2x the P/E of B. Why?
I got this question in an internship interview recently. I listed a potential recent lawsuit, the general economic differences in each respective country and a recent earnings miss by the lower valued company as possible reasons.
I personally think that these answers aren't bad, yet the interviewer literally responded with: "That answer was rather disappointing. Next one". Can you think of a reason why he said that?
It might be because you said a recent earnings miss by one of the companies when he told you the financial statements between the companies are the same, meaning had the same earnings.
I guess thats one way to look at my answer lol. Thx, didn't see that angle
Well you are missing the point.. What matters is what the market was expecting. For example two companies could have announced the same earning say 100. But if the market was expecting 120 for one company (could be due to higher growth expected) and 100 for the second. So, the financial result is the same for both but the market is likely to dislike first company for the miss and multiple will drop as a result
I see what you're trying to do. But if two companies have the exact same financial statements, then they should have the same growth profile.
What if two companies are in different industries? What if the market thinks that one company has some sort of advantage which is not reflected in financial statements, such as reputation, brand name, whatever...(and that's why is exptected to have a better growth). I don't think that if two companies have excat same financials then they should have the same growth profile. So many factors matter. Give you one more example, if topline of one company has been growing at 15% annauly and topline of the second company has been growing at 5% (but it was in the business for longer). So emagine these two companies having the same financials at some point in time, but fisrt company has shown a faster growth and achieved the results of the more mature company within a much shorter period, thus might deserve a higher multiple. Obviosuly mupltiples are not just based on growth. This is just what i am thinking and not necessarilycorrect
If in different industries, then financial statements are not "exactly the same". Revenue is different, margins are different, metrics are different, profitability is different, balance sheet is different, cash flows are different, literally everything will be different if in different industries.
No. Having the same financial statements doesn’t preclude one from missing earnings projections while the other didn’t. That said, still don’t think it’s the best answer.
It’s because they’re in completely different industries and a high growth tech company may have a PE double that of a big box retailer
Forgot to mention, they were in the same industries!
One could be a growing company while the other is a mature company.
All you had to say was that trump tweeted about one
Also, two companies might have the same financial statements but can have completely different growth prospects . Thus, higher growth company might have higher P/E
Good point
Overall I don’t think that u said something wrong. Your answers are correct, but probably they lacked detail. Anyway, in my opinion there is no reason for the interviewer to say that the answer is disappointing unless you say something completely wrong
This is the correct answer. One company might have a new product or something else anticipated to increase its growth rate relative to the other company, despite identical growth rates (and margins, CF, leverage, etc.) in the past.
A theoretical earnings miss wouldn't create a PE disparity, it would only correct one that existed before, as investors would bid the stock of the company that missed down until that company's PE matched that of the nearest comp.
The answer is different growth prospects.
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Well in that case equity on the balance sheet would not be the same
Lapse of judgement on my end. Thanks
Think most of the answers here are very markets-focussed (relative valuation multiples etc).
I would approach this by going through the drivers of a DCF. A is worth more than B when: - Better top line growth - Better profitability expectations - Lower capex - Lower NWC requirements - Lower effective tax rate
Additionally: potential for public offer / synergy potential of such a deal
I believe your asnwer is correct but again it comes down to what the market is thinking. Like if the market is thinking that the company is going to need less capex or lower NWC needs to achieve the same growth of company B then its gonna give a higer multiple to company A
I totally agree with you. Just saying its more than an earnings miss or just topline growth.
I have an answer for you. This question is retarded.
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