Price earnings ratio (PER) cover calculator

The price earnings ratio (PER) method of valuation focuses on a company's anticipated future profitability and the perceived present-day value of these profits. The higher the ratio, the greater future profits are expected to be relative to the current profits.

The valuation is calculated by multiplying after-tax profits by a factor, the (PER), which reflects the prospects for the business and the industry.

Formulas
Company valuation =	net profit after tax  x  PER
Value of shareholding =	percentage of issued share capital owned  x  company valuation
Required Figures: Net profit after tax: £   PER: £   Percentage of issued share capital owned:   %
Your calculations:		Result:
Company valuation =	x  x  y   =	a
Value of shareholding =	z%  x  a   =	result

The PER is the share price divided by the earnings per share. A list of industry average PERs can be found in the Financial Times, which indicate the maximum PER which it's reasonable to use. Generally, a company which has the potential for above-average growth will have a higher PER than a company managing only sluggish growth. However, it's important to remember that these multiples are 'the stockmarket's' view of well-researched, quoted businesses which offer much greater liquidity than a private company.

In a start-up situation, the PER may be very high in relation to current profits due to high initial costs. In this scenario, the valuation report or business plan should explain how the future level of profitability would be achieved.

• Where PER is unknown a multiple of five times net profit would be reasonable. (Directors' basic salaries can also be added back into profit.)

These are only guidelines. Underwriters usually want to establish that the cover is reasonable, so it's about building the case and justifying the level of cover.