On the day that Facebook is to be floated I have been asked whether they represent good value or are they another over hyped technology company.One of the best ways to calculate the potential value of a company- and it’s shares, is to look at it’s pe- which is it’s price/ earnings ratio.
This measures a company’s capitalisation as a percentage of the number of years current profits.
In Facebook’s case they made roughly a billion dollars of profits last year.
According to the Financial Times today the approximate value of it’s total capitalisation may be just above one hundred billion dollars.
So dividing capitalisation by profits derives a pe of around 100.
The principal usage of the pe calculation is to compare stock investors’ valuation of one company against the hype of another company.
So for example another possibly overhyped company- the world largest company by capitalisation, is Apple Inc.
Apple’s current pe ratio is only 16. So they are less than 6 times underhyped.
“Value is in the pocket of the purchaser” is one of the Guaranteed Sales favourite phrases.
To answer the question of hype or value- please consider whether you would prefer to invest your hard earned cash in a company which is already sitting on $100 billion in cash with products flying out of the door all around the world- or where the other company is supposed to be theoretically growing it’s profits at six times even faster.
Given the choice my money is with Apple.