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sir when using P/E method for valuation of target company, we need Future Maintainable earnings as our denominator. but what if the estimate is that in the first year after acquisition target’s say, revenue increases by 25%, then 35% in second yr and 10% thereafter. What figure should we value target’s revenue at? Historic revenue is $10,000. so should we value revenue at $12,500? $11,000?
We do not need future maintainable earnings when using PE ratios!!
PE ratios are calculated using current earnings, and we use current earnings when using a PE ratio to calculate the market value.
Obviously the more future growth shareholders are expecting, the higher the PE ratio will be, as I explain in my lectures, but we do not take this into account when calculating the PE ratio or when using the PE ratio.
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