CGNT Cognyte Software Ltd

You can ether set your own Fair P/E multiple or use one of the automatically calculated Fair P/E multiples.

Fair P/E calculation

PE Ratio is an attempt to estimate a fair PE ratio of a stock based on its earnings and growth rate.

This formula is a modified version of the classic Graham-Dodd Formula (V= EPS x (8.5+2g)), originally developed by Benjamin Graham, to calculate the fair price of a stock based on its earnings and growth rate.

The formula we have created is an adaptation of this approach, designed to maintain a balance between simplicity and growth sensitivity.

It is calculated using the following formula:

Here’s what each part of the formula means:

g: Growth is calculated as the average of the three-year average EPS growth rate and the one-year EPS growth rate (annually). This approach provides a balanced measure of growth by factoring in both the long-term growth trend and the most recent annual growth performance. If one of the growth metrics is not available, the remaining metric is used to determine growth. The fair P/E value is capped at 100 to prevent distortions caused by extreme EPS growth rates, such as those resulting from large percentage increases from a low base.

m: This is the long term historical median PEG (Price/Earnings to Growth) ratio of the overall market. It serves as a benchmark, adjusting the Fair PE based on typical market conditions.

b: Base PE (static value set to 8). If the company's growth rate is less than 5, the Fair PE is set at a conservative baseline of 8. This is because declining companies generally deserve a lower PE ratio.

Fixed vs Dynamic

Fixed: The Fair PE ratio for all data points is calculated using a single, constant average EPS growth rate, determined based on the most recent period. This means that the same growth rate is applied to all historical data points. Dynamic: The Fair PE ratio for each historical data point is calculated using the trailing average EPS growth rate specific to that point in time. This means that for each data point, the corresponding trailing EPS growth rate is used, ensuring that the Fair PE ratio reflects the growth conditions that were relevant at that specific point in history.