Page 74 - Stakis Consolidated Teaching Note

Management could now fully address the key issue which
is to improve the share price. At the end of the day that is

what management is appointed for. So what makes share

price what it is?

There is a very simple theory that the share price is the

product of earnings per share in pence times the price

earning ratio, sometimes known as the multiple. If the
Bodyshop has earnings per share of 10p and a multiple of

36, the share price will be £3.60. While this is simple and

self-evidently true, what it doesn't tell you is why the Stock

Market gives different multiples to different companies in
evaluating shares.

Two things that matter the most are confidence and
prospects. If the Stock Exchange generally view the

company as being soundly run with no surprises in store

and certainly with no `black holes’, they will accord a high

multiple. Conversely, if they regard it as a company run by
a bunch of idiots who are probably lying about the results

and who are likely to run the company into the ground,

they would probably give it a low multiple. Stakis clearly,

changed the perception held about it.

Secondly, prospects. If a company's earnings per share

grow year on year rapidly and consistently the Stock
Market will accord it a higher multiple simply because to

multiply this year's profit by an ordinary multiple when you

know that next year's profits are going to be

proportionately much greater would be to undervalue the
shares. Stakis is now considered a company with