# PER and Valuation of a Private Company – Case of Dyson

Dyson is a British private technology company founded in the UK in 1991 by James Dyson. It designs and manufactures home appliances such as vacuum cleaners, air purifiers, hairdryers, bladeless fans, heaters and lighting. It is a global company expanded to Europe, Asia, and North America.

We will value Dyson’s equity value using PER.

### Definition of PER

PER (Price to Earnings Ratio) is the most used relative valuation method in various fields, including research reports and IPO. The calculation is simple and reflects the atmosphere of the stock market by linking to corporate profit.

#### PER = Share price / EPS (Earnings per share)

PER is a multiple of share price divided by earnings per share. It means how much investors pay for the company’s £1 profit to buy the stock in the market. For example, if PER is 10x, investors pay £10 for the £1 income of the company. They will pay higher if they believe that the company’s profit will grow in the future. On the contrary, if the market notices that there would be a risk that might reduce the gain, they will pay lower.

The market uses PER very well, but it is often miscalculated. In particular, it happens more often for the EPS, which goes to the denominator of PER.

#### EPS = Net income / Shares outstanding

To get EPS, you divide net income by the number of shares. Here, the method of calculating the net income and the number of shares should be applied to all comparable companies in the same way.

• You can pick up one net income among three points; the latest fiscal year’s one, the latest 12 months’ one, or the next fiscal year’s one which is estimated. Those EPSs are called Current EPS, Trailing EPS, and Forwarding EPS in order. Depending on which EPS you choose, the calculated PERs are called Current PER, Trailing PER, and Forwarding PER in order.
• You can also calculate the number of shares in two ways. One is to consider only the number of current floating shares, and the other is to assume that all the conversion rights and stock options issued by the company have been exercised. The EPS calculated by the former method is called Primary EPS, and the one by the latter is Diluted EPS.

In the case of high-growth companies, PER can significantly change depending on which EPS you use.

• Their earnings grow every year, so the forwarding EPS is higher than the trailing EPS. Thus, the forwarding PER is lower than the trailing PER.
• High-growth companies are more likely to issue hybrid securities, and they may give employees stock options. If all of those options are exercised, the diluted EPS will be lower than the primary EPS as the number of common stock increases.

Therefore, you should apply the same standards to all comparable companies when calculating their net income and number of shares. If you quote PER from financial information companies or internet sites, you need to understand how they calculate the PER.

### Valuation of private companies using PER

You can use PER to value the stock of a private company. The method is to multiply a target company’s EPS by listed comparable companies’ PER.

#### Target company’s stock value = EPS of a target company x PER of listed comparable companies

The calculation seems simple, but it requires elaborate work to do correctly.

1. Select listed companies to compare the target company to, and
2. Calculate the PER of each comparable company on a consistent basis.
3. Calculate the target company’s EPS in the same way as the calculation of the comparable companies’ EPS, and
4. Value the target company’s stock.

Let’s analyse a case by following those four steps.

### Case: Valuation of Dyson

#### Step 1: Select comparable companies

To find listed comparable companies for Dyson, you should analyse Dyson’s business first. Briefly, Dyson is a company that manufactures and sells high-end home appliances. As of 2018, in the UK alone, the sales growth rate was 9% on average over the past five years, and most of the sales were B2C. Here, Yahoo Equity Screener was used to find comparable companies.

As selection criteria, the region was set to be the UK, the market cap of more than £10 million, the sector as technology, and the industry as consumer electronics, electronic components, and scientific & technical instruments. Resultingly, it had shown a total of 10 companies as follows.

However, some of the subjective standards were involved at this stage. First, Yahoo Equity Screener was used to select companies. Second, only the companies having the market cap more than £10 million were chosen by regarding Dyson as a large company. Lastly, only the industry of home appliance was selected first, but it showed only one company. So the target industry was expanded by adding electronic parts and science and technology equipment. If other evaluators apply different criteria, the peer group will also be different.

#### Step 2: Calculate the PER of the peer group

As shown below, 10 companies were listed in order of market cap using Excel to organise fundamental data, including PER.

Among the 10 companies, some were excluded from the final PER calculation by following the procedure below.

• First, ITM Power and Vitec Group, which recorded the loss, were excluded since they do not have a PER multiple.
• Second, companies with trailing PER having more than 50x were considered outliers. Renishaw and Gooch & Housego were they. Renishaw’s net income had fallen to £0.3million from £92million, resulting in a sharp rise in PER. Gooch & Housego had a similar reason, which made the PER so high in an odd way. Thus, the two companies were out of the calculation.

After excluding the four companies, the average trailing PER of the remaining six companies was 28.8, and the forward PER was 23.6. The forward PER is lower than the trailing one because the EPS for most companies is expected to grow next year.

At this step, the subjective criterion was that companies with trailing PE over 50 were considered as outliers.

#### Step 3: Calculate the EPS of the target company

To calculate Dyson’s EPS, you should look at how the PER of the peer group was calculated. There are two types of PER for them, trailing PE and forward PE. If you use the forward PE, you need to estimate the Dyson’s EPS for the next year. If you use the trailing one, you may use the Dyson’s previous year’s one.

#### Target company’s stock value = Trailing PE of the peer group x Trailing EPS of a target company

This case will use the trailing PE from the peer group and the trailing EPS from Dyson. The peer group also used diluted EPS. Thus, Dyson’s EPS should also be diluted by calculating as the number of diluted shares.

#### Diluted EPS = Net income for trailing 12 Months / Number of diluted shares

The total number of shares issued is 2,222 as of the 2018 audit report of Dyson. It did not issue any hybrid securities and did not disclose any stock options. Therefore, Dyson’s basic EPS and diluted EPS are considered the same. If hybrid securities were issued, you should include the number of shares convertible at the exercise price in the number of currently issued shares. The same goes for stock options. Dyson’s 2018 net income is £263.2million. Divided by 2,222 shares issued, the EPS is £118,452.

Dyson’s trailing EPS = £263.2million / 2,222 = £118,452

#### Step 4: Target company’s stock price

You obtain Dyson’s share price by multiplying the peer group’s trailing PE of 28.8 by Dyson’s EPS of £118,452.

Dyson stock price = 28.8 X £118,452 = £3,411,410

Finally, Dyson’s estimated share value is around £3.4million. The price seems very high because the number of issued shares is low and the profit is significant for Dyson. You can get the total equity value of Dyson by multiplying the share price by the total number of outstanding shares.

Dyson’s total equity value = £3,411,410 X 2,222 = £7,580,160,000

Dyson’s estimated total equity value is around £7.6billion. It is much larger than the market caps of comparable companies.