I have not understood these statements. 1.when shares are repurchased at price higher than current Book value per share it lowers the overall book value per share. 2.sales * net profit margin = net income. ok i know that. therefore P/E* net profit margin =price/sales…how??
Regarding 1: Just realize that the company is paying more than the amount the shares are held on its balance sheet. Let’s imagine a company like the following: Assets: 100mn Liabilities $50mn Since book value is ‘net worh’ - in other words, Assets - Liabilities, this company would have a book value of $50mn. Let’s imagine that there are 1 million shares outstanding. So book value per share is $50. Let’s suppose the company bought back 100,000 shares, using cash, for $55 per share. The company would thus be spending 100,000 X 55 = $5.5mn. So cash (assets) decline by that amount: Assets: $94.5mn Liabilities: $50mn So the book value has declined to 44.5mn. And the book value per share is $49.44. The shares were ‘held’ on the balance sheet at book value, and we paid more than that to buy them back. Ergo, the average book value for the remaining shares has to fall. Will respond later to #2,
that’s well explained. thank you
2: NI/SALES = NET PROFIT MARGIN P/E = P/NI (per share) so P/NI * NI/SALES = P/SALES or P/NI*netprofit margin = P/SALES