This post explains that the technique of deriving a share valuation using (ROE/RRR) x Book gives the same answer as the EPS x PER, where PER is 1/RRR. This would be obvious to many, but there are people who decry using a PER x EPS approach, and then they use an approach that mathematically equates to EPS x PER. I'll justify this logically, and then demonstrate it using CCL's YE 31/12/2012 metrics of:
RRR=6% ROE = 26.9% Book =$2.72 EPS =$.734
Book value per share is equity per share, so ROE is equal to EPS/Book. Consequently, (ROE/RRR) x Book = EPS/RRR x Book /Book = EPS/RRR. This is exactly the same as saying IV = EPS x PER where PER is 1/RRR, or in English, where the Price/Earnings Ratio is the reciprocal of the RRR.
using the metrics provided, the formula (ROE/RRR) x Book would give (26.9%/6%) x $2.72 = $12.19
The reciprocal of 6% (1 divided by 6%) = 16.667, CCL's EPS for calendar year 2012 was 73.4¢, so if we use a PER of 16.667, then CCL's so-called intrinsic value would be 16.667 x $.734 = $12.23. The small difference in value compared to $12.19 arises from rounding of the metrics used.
Both formulae derive point-in-time values – they do not account for growth, unless investors adjusts the PER, or RRR, to accommodate growth, or they derive multiple values for different years.
