Derive Price Earning (PE) ratio as a function of ROIC (Return on Invested Capital)
KIndly derive with formulas.
P/E = Market value per share/Earnings per share
Now Earnings Per share(EPS)= (Net income-divided)/Total no.of outstanding shares
And ROIC= (Net income-dividend)/Total Capital
so from this we can say that (Net income-dividend) = ROIC*Total Capital
so now replace this in EPS equation we get EPS=(ROIC*Total Capital)/Total No.of outstanding shares
Now replace in PE ratio formula
we get PE ratio= Market value per share/Earnings per share
=Market value per share/(ROIC*Total Capital)/Total No.of outstanding shares
By re arranging we get Price Earning (PE) ratio as a function of ROIC (Return on Invested Capital)
PE ratio= (Market value per share*Total No.of outstanding shares)/(ROIC*Total Capital)
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