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The Daily Technical #110: Which is more important, the income statement or the cash flow statement?

How to answer "How can you forecast a company's implied share price using its EPS?"

February 11, 2025

Good morning. Welcome to the 110th edition of The Daily Technical.

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OVERVIEW OF YESTERDAY’S QUESTION
How can you forecast a company's implied share price using its EPS?

To forecast a company's implied share price using its EPS, begin by understanding that the P/E ratio equals the share price divided by the EPS.

Estimate the share price by multiplying the forecasted EPS by an assumed P/E ratio. A conservative tactic is to use the current P/E ratio (or slightly lower).

Verify the estimate by comparing it to the consensus EPS annual growth rate as an indicator of share price growth.

Remember, this method assumes a steady P/E and offers an approximation, not an exact prediction.

Common Mistakes

  1. Miscalculating share price by forgetting the relationship between EPS and P/E ratio. Remember, the formula involves multiplying the forecasted EPS by the chosen P/E ratio to get the implied share price.

  2. Incorrectly picking an unrealistic P/E ratio assumption, leading to skewed forecasts. Avoid this by using the company's current P/E or a slightly adjusted figure.

TL;DR

  • Share Price = Forecasted EPS x Assumed P/E Ratio.

  • Use a company's current P/E ratio (or slightly lower) for a conservative estimate.

  • Verify with consensus EPS growth rate as an indicator of share price growth.

  • Remember: This approach suggests an approximation, not an exact price forecast.

TODAY’S QUESTION
Which is more important, the income statement or the cash flow statement?

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