Dear Tiago, Thanks for such a thorough explanation, Aflac is an incredible company and is a favourite company of mine. What I cannot understand is where did you get the 0.181 from in the Profit Margin to PE Method. I looked at the KO and PEP example and I still couldn't figure it out. Am I missing something?
The 0.181 number is Aflacs profit margin (pre-tax). It is calculated by dividing the pre-tax income by the total revenue. If we multiply that by 100, we have the 18.1% margin that we are familiar with.
Effectively what this means for the Profit margin to PE method is that if AFL is selling at a PE below 18.1 it is undervalued.
No, the operating margin is something else. The main difference is that Operating Margin is pre-interest costs, whereas this measure includes the costs related to interest.
In companies with low to no interest related expenses, the two will be a very similar value, however when we discuss companies with high debt load, they will have lower profit margins, since that cash is being channeled to service debt rather than to investors.
Thank You I really like how you keep it simple. Where did you learn this form? It sounds like a Ben Graham type calculation. Is it your preferred valuation tool?
Dear Tiago, Thanks for such a thorough explanation, Aflac is an incredible company and is a favourite company of mine. What I cannot understand is where did you get the 0.181 from in the Profit Margin to PE Method. I looked at the KO and PEP example and I still couldn't figure it out. Am I missing something?
Dear Tiago, Thanks for such a thorough explanation, Aflac is an incredible company and is a favourite company of mine. What I cannot understand is where did you get the 0.181 from in the Profit Margin to PE Method. I looked at the KO and PEP example and I still couldn't figure it out. Am I missing something?
Thank You.
Hello Denny,
The 0.181 number is Aflacs profit margin (pre-tax). It is calculated by dividing the pre-tax income by the total revenue. If we multiply that by 100, we have the 18.1% margin that we are familiar with.
Effectively what this means for the Profit margin to PE method is that if AFL is selling at a PE below 18.1 it is undervalued.
Best regards,
Tiago
Thank You Tiago - I guess that is also called the Operating Margin correct?
No, the operating margin is something else. The main difference is that Operating Margin is pre-interest costs, whereas this measure includes the costs related to interest.
In companies with low to no interest related expenses, the two will be a very similar value, however when we discuss companies with high debt load, they will have lower profit margins, since that cash is being channeled to service debt rather than to investors.
Thank You I really like how you keep it simple. Where did you learn this form? It sounds like a Ben Graham type calculation. Is it your preferred valuation tool?
Dear Tiago, Thanks for such a thorough explanation, Aflac is an incredible company and is a favourite company of mine. What I cannot understand is where did you get the 0.181 from in the Profit Margin to PE Method. I looked at the KO and PEP example and I still couldn't figure it out. Am I missing something?
Thank You.