Shareholder Earnings to Market Ratio
factor.formula
Shareholder earnings calculation formula (Scenario 1, considering maintenance capital expenditure):
Shareholder profit calculation formula (scenario 2, excluding maintenance capital expenditure):
The formula for calculating the shareholder earnings to market value ratio is:
in:
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The operating results of a company in a certain accounting period, that is, the total profit after deducting costs, expenses and taxes from revenue.
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The total value of a company's outstanding shares multiplied by its current share price reflects investors' assessment of the company's overall value.
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Capital expenditures necessary to maintain a company's existing production capacity and operating levels are usually used for equipment updates and maintenance.
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The decrease in value of fixed assets and intangible assets due to use or the passage of time is an expense that is regularly charged to profit or loss in accordance with accounting standards.
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Adjustments to the carrying amount of an asset reflect potential losses in value due to declines in market value or insufficient expected future cash flows.
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The expenses incurred by a company for research and development of new products, new technologies and new processes reflect the company's investment in innovation.
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Income tax expense resulting from timing differences between accounting and tax treatments is an adjustment to income tax expense that may be affected in future periods.
factor.explanation
The shareholder earnings to market value ratio is a value-based indicator based on Buffett's concept of shareholder earnings. This indicator more closely reflects the company's true free cash flow generation ability by adjusting net profit, eliminating non-cash items in accounting standards (such as depreciation and amortization), adding back expenditures intended to promote long-term development (such as research and development expenses), and considering maintenance capital expenditures (such as scenario one). Compared with directly using net profit, shareholder earnings can better reflect the company's profit quality and avoid possible profit manipulation under the accrual basis. Comparing shareholder earnings with the company's market value can effectively assess whether the company's value is underestimated. The higher the ratio, the stronger the company's profitability relative to the market value, and the higher the investment value may be. Scenario one is more suitable for mature companies with relatively stable capital expenditures; scenario two is more suitable for rapidly developing companies with large fluctuations in capital expenditures. In actual use, it can be flexibly selected according to the industry characteristics and life cycle stages of different companies.