PEND – Improving the PE Ratio

It’s easy to use PEND to assess the prospects of any stock. PEND uses four numbers readily available from newspapers or financial websites to decide whether a stock merits further investigation. Here we show you how PEND works and provide you with a PEND calculator to get you started.

In the past, many investors have determined the value of a stock using the price/earnings ratio (the p/e or pe).

To find a stock’s price/earnings ratio you divide its current share price by its earnings per share. So, a pe ratio of 10 means it costs you $10 to buy $1′s worth of annual company profit.

One of the pe ratio’s drawbacks, however, is that it says nothing about two absolutely crucial aspects of business performance:

1. How efficiently managers employ the business’s capital.
2. Whether managers reinvest enough profits into growing the business.

A stock-screening method outlined in Forbes magazine in 1988 addresses this issue by adding two numbers to the traditional pe analysis.

The PEND method, as we have named it, uses simple arithmetic to discover shares likely to outperform the market. (We have provided a PEND calculator at the bottom of this page.)

The PEND method is powerful, yet straightforward. It needs just four numbers to analyze a stock.

They are; Share Price, Earnings, NTA and Dividend.

Note: Some investors may be unfamiliar with NTA. NTA is a company’s Net Tangible Assets per share, also called Book Value by some. NTA is the total value of a company’s assets, excluding intangibles such as goodwill and trademarks. Its inclusion is crucial to PEND because it provides us with a way of assessing how well a company is using its assets – something a simple pe ratio cannot do.

From the four numbers above, PEND calculates three figures that instantly tell us whether a stock is attractive compared with run-of-the-mill stocks. The first number we call Performance, the second we call Reinvestment and the third, Sum, is found by adding the Performance and Reinvestment numbers.

1. Performance

Performance tells us whether the company is earning enough money (compared with its share price) to interest us.

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Performance = 100 x (Earnings + Dividend) / Share Price

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2. Reinvestment

Reinvestment tells us whether the company is earning a good enough return on its assets and whether enough of that return is being plowed back into the business. This is essential for growth. The stock market is heavily biased towards rewarding growth companies.

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Reinvestment = 100 x (Earnings – Dividend) / NTA

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3. Sum

Sum tells us whether a company’s overall finances are better than normal.

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Sum = Performance + Reinvestment

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By studying the history of outstanding companies, we have learned to demand that Performance should be higher than 9, Reinvestment higher than 7, and Sum higher than 24.

And there you have it, PEND. Use it wisely and beat the market.

Using our online calculator, you can find the PEND rating for any stock you like.

You can also download our Excel spreadsheet to perform PEND calculations. (Some readers who use the Firefox web browser have encountered download problems. The download works 100% in other browsers, including Microsoft Explorer, Opera and Safari.)

Note. You may prefer to use PEND in conjunction with a Safe Buy test.

PEND Calculator

Share Price:		(cents)
Earnings per Share:		(cents)
NTA:		(cents)
Dividend per Share:		(cents)
Performance		(Require 9 or more)
Reinvestment		(Require 7 or more)
Sum		(Require 24 or more)