Underlying Earnings (Price Multiple Approach)

CFA Level II
#1

Hey everyone, hope all your study sessions are thorough and understandable!

My question is with regards to underlying earnings. In the Schweser Book they provide data for a company and ask that we calculate the trailing P/E using underlying earnings.

Data:

12/2013: stk price = 38.50 reported eps = 1.45 gain on asset sale = 0 extraordinary expenses = 0

3/2014: = 46.25 = 1.30 = 0.30 = 0

6/2014: = 48.50 = 1.40 = 0 = 0.55

9/2014: = 44.85 = 1.35 = 0 = 0

Answer:

12-month EPS = 5.50

underlying earnings = 5.75;

I understand why we subtract gain on asset sale but can’t visualize why we add extraordinary expenses. My rationale is that it’s a one time expense that will not continue in the future (but is there some other reason I’m not seeing?). And if so, is this the case for extradordinary revenue items and we subtract it to get underlying earnings?

trailing P/E = 44.85/5.75 = 7.80 times

Thoughts? S2000magician?

#2

You’re rationale is correct. When we’re calculating underlying estimates our aim is to eliminate any non-operating or recurring gains/losses. Since a gain on an asset won’t be recurring, nor will an extradionary epxense. We add and subtract those back as needed.

So in this case: 1.45 + (1.30 - .30) + (1.40 + 0.55) + 1.35 = 5.75

Does this answer your question? Were you just looking for re-assurance? I couldn’t tell

#3

Mosstastic nailed it.

If it ain’t recurring, remove it.

#4

Thank you, I was looking for reassurance that my rationale was correct. Quote of the day for equities from S2000Magician: “if it ain’t recurring, remove it”