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Antoinette Sanford Financial Statement Analysis

This analysis focuses on the Price/Earnings (P/E) ratio, a key metric in the multiples approach to valuation. It highlights its significance as one of three ratios used, alongside market/book (M/B) and price/sales (P/S) ratios. The analysis compares PetSmart, Inc. with its competitors, including Target Corporation and Bed Bath & Beyond, discussing the pros and cons of the multiples approach compared to discounted cash flow models. Variability in earnings among peers and potential for skewed results in single-year assessments are also considered.

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Antoinette Sanford Financial Statement Analysis

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  1. Antoinette SanfordFinancial Statement Analysis FIN620-0804B-01 Dr. Wayne Hollman Unit 5 IP - 11/08/2008

  2. Price Earnings (P/E) RatioMultiples Approach • P/E ratio = current market price per share earnings per share • The P/E Ratio is one of three ratios in the multiples approach valuation model

  3. Multiples Approach Valuation Model • Uses three different ratios: • price/earnings (P/E) • market/book (M/B) • price/sales (P/S)

  4. “Comparable” Firms • “Comparables” are similar in terms of: • economics of underlying business • projected earnings growth rates • accounting methods • operating margins • capital structures

  5. “Multiples Approach” Valuation WHY?  • Generally preferred over discounted cash flow valuation models because it is a much quicker calculation process. • Considered “valid” because it is so commonly used.

  6. “Multiples Approach” Valuation WHY NOT?  • Earnings may vary among comparable firms • Single year results may be skewed RESULTS? • Inaccurate valuation.

  7. PetSmart, Inc. – Target Firm • PetSmart, Inc. - a “Specialty Retailer” whose three top competitors are: • PetCo – next largest pet supplies retailer • Target Corporation - selected as comparable • Walmart Stores, Inc. – not considered comparable

  8. Comparable Firms Specialty Retailers comparable to PetSmart: • Target Corporation • Bed Bath & Beyond Inc. • Williams Sonoma, Inc.

  9. COMPARABLESComparative Financial Ratios

  10. PetSmart, Inc. vs Comparables

  11. Price Earnings (P/E) Ratios

  12. References • Soffer, L.C. and Soffer, R.J. (2003). Financial statement analysis: A valuation approach.Upper Saddle River, NJ: Pearson Prentice Hall. • Bed Bath & Beyond Inc.Retrieved 11/09/2008 from: • http://www.reuters.com/finance/stocks/ratios?rpc=66&symbol=BBBY.O • PetSmart, Inc. Retrieved 11/09/2008 from: • http://www.reuters.com/finance/stocks/ratios?symbol=PETM.O • Target Corporation. Retrieved 11/09/2008 from: • http://www.reuters.com/finance/stocks/ratios?symbol=TGT.N&rpc=66 • Williams-Sonoma, Inc. Retrieved 11/09/2008 from: • http://www.reuters.com/finance/stocks/ratios?symbol=WSM.N&rpc=66

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