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Formula sheet/NISM Series XV: Research Analyst/Valuation Principles
[ VALUATION PRINCIPLES ]

Relative Valuation Multiples & Peter Lynch PEG Ratio

P/E Ratio=Market PriceEPS∣PEG Ratio=(P/E Ratio)/Earnings Growth Rate(g in%)P/\text{E Ratio} = \dfrac{\text{Market Price}}{EPS}\quad\Big|\quad \text{PEG Ratio} = (P/\text{E Ratio}) / \text{Earnings Growth Rate} (\text{g in} \%)
Dividend Yield=DPSCMP∣Earnings Yield=EPS/CMP=1/(P/E)\text{Dividend Yield} = \dfrac{DPS}{CMP}\quad\Big|\quad \text{Earnings Yield} = EPS / CMP = 1 / (P/E)
EV/EBITDA=EVEBITDA∣EV/Sales=EVAnnual Net SalesEV / EBITDA = \dfrac{EV}{EBITDA}\quad\Big|\quad EV / Sales = \dfrac{EV}{\text{Annual Net Sales}}
Implied ROCE from EV Multiple=ROCE/(EV/Capital Employed)\text{Implied ROCE from EV Multiple} = ROCE / (EV / \text{Capital Employed})
Variables

Peter Lynch benchmark: PEG < 1.0 indicates undervaluation relative to growth; PEG > 1.0 indicates overvaluation.

Worked examples
Free Cash Flow to Firm (FCFF) and Equity (FCFE)

Infosys reports EBIT of Rs 28,000 Cr, Tax Rate 25%, Depreciation Rs 4,000 Cr, Capex Rs 3,200 Cr, and Non-Cash Working Capital Increase Rs 800 Cr. Finance Cost is Rs 200 Cr, and Net Debt issued during the year is Rs 500 Cr. Calculate FCFF and FCFE.

Peter Lynch PEG Ratio & Peer Comparison

Stock A trades at P/E 24x with projected EPS growth of 20% p.a. Stock B trades at P/E 16x with projected EPS growth of 10% p.a. Calculate PEG ratios and determine which stock offers better value.