A quick check on some portals online for Oando’s price earnings ratio will suggest a multiple of 5.9x, a figure most people would consider as cheap. Oando is currently priced at N27.30 (8/8/14) and many who see this P.E ratio will surely see it as a bargain. But is that really its price earnings ratio? If it is not then that information may just be somewhat misleading. Let us run a quick check.
Price earnings ratio is basically the market value of a company divided by its most recent full year profit after tax. This supposedly easy formula can be complicated when you start to factor in outstanding shares. I will show you how in a bit, but first what is its true P.E ratio?
Oando in its last 2012 Audited results posted a profit after tax of N10,7866,317,000 (N10.7billion). Today its market value is about N242,125,360,000 (N242billion). If you then divide N242billion by N10.7billion you get a P.E ratio of 22.4x.
How then do some websites get it all wrong? It’s boils down to outstanding shares and how it can distort metrics. When Oando released its results in 2012 it had an earnings per share of N4.58 suggesting a total outstanding shares of about 2.355billion. Today, Oando is a much more diluted company and the total outstanding shares is now 8.869billion. So basically, they have used the current market price which is based on the most recent quantum of shares outstanding and divided it by earnings per share based on an outdated number of outstanding shares. The result is about 5.9x, that is N27.3/4.58 which is equal to 5.96x.
So beware of what you see online and take out time to do your own analysis or source for more info.