Findx valuation guide

The earnings behind the calculation

To turn a chosen P/E into a price, Findx needs an earnings figure for each chart date. We calculate that figure by moving gradually between the company’s annual earnings figures.

What are earnings per share?

Earnings means the company’s profit after costs. Earnings per share (EPS) is that profit divided by the number of shares. A company earning 200 with 100 shares has earnings of 2 per share. That profit belongs to the company; it is not automatically paid to you.

Why blend yearly figures?

The accounts give annual earnings figures, but the chart covers dates between them too. Blended earnings is our name for the in-between figure. It moves towards the next annual figure as time passes.

In the fictional example below, the earlier annual earnings are 1.80 per share. Analysts—people who study the company—expect 2.20 for the next year. Halfway between the dates, the blended figure is 2.00.

Earlier year 1.80 Reported earnings

Halfway 2.00 Blended earnings

Next year 2.20 Analysts’ estimate

One quarter of the way between the dates, the figure is 1.90; halfway, it is 2.00; three quarters of the way, it is 2.10. This is a calculation for the chart, not a report of how much the company earned on those individual dates.

Use that figure to calculate value

P/E means share price divided by earnings per share. Your valuation method chooses the P/E; blending supplies the earnings figure. If you choose P/E 14.5 and the blended earnings are 2, fair value is 29:

2 earnings per share

× 14.5 chosen P/E

= 29 fair value per share

Blended P/E in the sidebar answers a different question: what does the actual share price cost relative to those earnings? At a share price of 32 and blended earnings of 2, Blended P/E is 16: 32 ÷ 2. It need not equal your chosen Fair Value P/E of 14.5.

Reported figures and forecasts

A reported figure comes from a completed company report. A forecast is an expectation, and can change. Past years normally use reported figures; future years use forecasts. A forecast may also fill a missing historical figure where the data allows it. Check the estimate markings in Findx before treating a number as a reported result.

Which earnings measure is selected?

The earnings choice changes the numbers behind the calculation. Compare like with like:

Diluted EPS: reported earnings per share allowing for shares that could be created, for example when rights to buy shares are exercised. More shares mean less profit per share when total profit stays the same.
Normalized EPS: earnings per share adjusted for certain unusual items, such as a one-off gain or cost. The aim is to make ongoing earnings easier to compare.
FFO: funds from operations, an earnings measure used for property companies. It adjusts for property accounting, including depreciation—the gradual reduction of a building’s recorded value in the accounts.
AFFO: adjusted funds from operations. It starts with FFO and makes further adjustments, such as subtracting recurring spending needed to maintain properties and their rental income. It remains a different measure from ordinary EPS. Source: Nareit’s AFFO definition.

FFO and AFFO are not necessarily cash available to pay to shareholders. When either is selected, the price comparison is labelled P/FFO or P/AFFO instead of P/E. The method still multiplies the chosen price-to-earnings number by the selected figure per share.

If a figure is missing or negative

Without the two annual figures needed for a date, Findx cannot calculate its blended earnings. P/E is only meaningful when those earnings are positive. Blending makes the line gradual; it does not make a forecast more certain.

The exact blending calculation

Blended earnings = earlier earnings × (1 − time fraction) + later earnings × time fraction. The time fraction is the share of the time between the two annual dates that has passed. Halfway means 0.5, so the example is 1.80 × 0.5 + 2.20 × 0.5 = 2.00.