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Relative Valuation in the Bloomberg Terminal: First step

This guide serves as an introduction to the functions within the Bloomberg Terminal that help to determine the value of the company using relative valuation principles.

To recap, the difference between the relative and absolute valuation is that it is not an effort to determine firm's fair share price but rather the objective is to determine if the company is over-valued, under-valued or fairly-valued.

Relative valuation is a two step process. The first step is to choose a good metric with which you can conduct the relative valuation.

Metrics

Common metrics used in relative valuation are dividend yield and price to earnings ratio.

First we take a look at dividends. They are regular, steady payments to shareholders that are paid as a part of company's earnings. Although it is hard to predict the future, dividend payments can be well estimated as they are based on the company's past dividend payments.

For the purpose of this guide, we will be researching Coca-Cola company. In the Bloomberg terminal type KO US in to the command line and find KO US Equity under the securities and click on it. Then type ´DVD` and press GO. You will get a summary of paid out dividend in the past year. You are looking both at the dividend amount and the dividend yield. Dividend amount tells how much the company paid out in cash for 1 share of the company while dividend yield is what % is the dividend amount compared to the price of 1 share. Dividends are usually paid out once or twice a year.

Dividend Yield % = ($ dividend per share / $ price per share)

With equities, shareholders own a part of the company and therefore they own all residual earnings of the company, not only dividend payments. Therefore, another useful measure is earnings yield. We can ca

Usually, the Earnings yield is usually higher than the dividend yield. In the case of Coca-Cola, we can see from the profile tab that the dividend gross yield is 3,37%. Let's calculate Earnings Yield so we can compare it. From the estimates we can see that the Estimated Earnings per Share is 2,08 USD and the current price is $46,32. Putting this into the formula gives us Earnings Yield 4.49%.lculate earnings yield as ($ earnings per share / $ price per share) = Earnings yield %

Last metric that we examine in the first step is the Price to Earnings ratio. It is basically the inverted Earnings Yield and the formula to calculate it is ($ price per share / $ earnings per share) = P/E ratio. Alternatively, P/E = firm market capitalization divided by its total earnings.

We can demonstrate that Earnings Yield and Price-to-Earnings are two inverted functions by opening Coca-Cola equity in the Bloomberg terminal and clicking on Graph Fundamentals.

Then in the select fields add Price Earnings Ratio and Current Earnings Yield. Now we can see that the chart of one function is equal to the other one when inverted.

You can also use this knowledge to understand why a share price of a company might go up. First if the estimated earnings increase but the P/E ratio stays the same then the price of the company goes up. This is called Earnings Growth. The other option is that estimated earnings stay the same but P/E goes up as investors expect the value of the company to increase in the future and thus already increasing the price of the company in the present. This is called Multiple Expansion.

We can demonstrate the correlation between Net Income of Company, its P/E ratio and total Market Cap by using again Graph Fundamentals. As a selected security we keep Coca-Cola (KO US Equity) and for Select Fields add Current Market Cap, Price Earnings Ratio and Net Income/Net Profit. Also we want to compare them on a single panel. Therefore, in the Select Chart Layout click on Singel Panel or Panel Per Security (in this case it is the same because we are viewing only one security - Coca Cola US Equity).

Now we can compare how the P/E ratio and Net Income over Net Profit affected the Market Capitalization of Coca Cola.

We can see that the Net Income from 2014 up to Q3 2017 moved up and down around 2 billion USD, yet market cap was affected only by move in P/E ratio which is influenced by estimates about future growth. Therefore, the market cap went from little bit under 170 billion USD in Q3 2013 to over 200 billion USD in Q1 2016 hand in hand with the Price to Earnings estimate.