The P/E for the TSE 300 Composite I...

The P/E for the TSE 300 Composite Index has fallen in latter months to about 27 times earnings, which compares to a a great deal higher level of almost 125 at the finis of 1993. This sharp decline illustrates the significant earnings vegetation being generated by the stocks making up the Index. most numerous of the quarterly losses incurred last year are being dropp from the latest 12-month earnings through share (EPS) calculations for individual stocks. Many of these losse were the accrue of large writedowns on investments and restructuring charges, which were symptomatic of the slowdown in the Canadian and international economies these past not many years. As well, in late 1989 the Canadian Institute of Chartered Accountants (CICA) changed the methods of accounting for Extraordinary Items. These lordships prohibited the classification of one non-recurring items as extraordinary, despite the fact these same items were generally considered extraordinary in the past. This exclusion policy has had an enormous impact forward the TSE 300 Earnings as a ensue Since these non-recurring items are no longer classified as extraordinary, they are included in the earnings calculations.

This late volatility or "blip" in the TSE 300 earnings has l to a closer observation of the underlying data making up the P/E and Earnings Adjusted to Index (EAI). The objective of this article is to explain the calculations and methodology used in determining the earnings series for the TSE 300

CALCULATION management AND PRODUCT

The computation conduct to calculate a price-earnings ratio and the corresponding earnings adjusted to index (in $'s) amount is straightforward and analogous to that for an individual stock. First, the float market capitalization of all the stocks must be aggregated, producing the numerator in the P/E calculation. This is simply the price of the stock multiplied by means of its float or adjusted shares (issued and outstanding shares minus regulate blocks of 15% or more), and then summ for all 300 issues. nearest the Latest 12-Month Earnings must be calculated. Each stock's earnings by common share (based on the latest 12-months) is multiplied by the agency of its float shares. All stocks are then aggregated to form the denominator of the P/E To calculate the EAI, simply take the Latest 12-Month Earnings, calculated as above, and divide this amount by means of the current divisor or "base" for the Index. The following example will help clarify these procedures:

P/E = Stock price x Float shares/EPS x Float shares

= Float QMV/Latest 12-Month Earnings

EAI = Latest 12 Month Earnings/Divisor x 1000

On October 27 1994 as printed in the TSE Daily Record, the TSE 300 had a P/E ratio of 2672 and the EAI was $15961 calculated by the agency of using the following data:

P/E = Stock price x Float shares/EPS x Float shares = $2672

EAI = Latest 12 Month Earnings/Divisor x 1000 = $15961

The reason that the EAI figure uses the divisor is to implicitly tie it to the Stock Price Index Value (SPIV). This same methodology applies to the Dividends Adjusted to Index (DAI).

On any given day the EAI or P/E may change from the previous days calculated values without a major change in the even of the SPTV. There are couple main reasons why these numbers for the TSE 300 (and any other index) can be altered. First, when a company reports its quarterly income/loss flows this may lead to a change in its latest 12-month EP figures. As an example, forward July 28, 1994, when BCE Inc. reported its 1994 next to the first quarter EPS of $0.64 versus a los of $178 in the previous year, the deduction was an increase of $228 in its EP in succession a trailing 12-month basis. This l to an increase of $1183 in the EAI, and the P/E ratio to fall from 3749 to 3355 Secondly a company may have a change in its calculated float shares. This can either be done by dint of a company issuing/cancelling shares from treasury; the major shareholder changing its have charge of block position, or both. In these particular cases the impact is fairly insignificant because while the float shares might be dramatically changed, the float QMV of the Index is adjusted as well as the divisor.

CURRENT VALUATIONS

The Earnings Adjusted to Index has lately risen to $160.22, a 1717% increase from $882 where it bottomed upon February 7, 1994. On this particular day in February, seven of the fourteen major collections had negative earnings! As of the cessation of October, there were merely two major groups of the TSE 300 with negative earnings, those being Paper & Forest works and Real Estate. Over this first quarter ending in September, the EAI had risen 54% most numerous of this increase can be attributed to the stocks in the Industrial harvests Transportation/Environmental Services, Utilities, and Financial Services clusters The P/E has also fallen to a more normalized on a level of 26.76. Prior to 1990 before the CICA accounting command changes were implemented for extraordinary items, the TSE 300 P/E ratio ranged from 8 to the mid 30s

WHERE TO?

Will this upward incline in earnings growth continue beyond this year? According to several brokerage firm research departments, it may well continue into 1995 In a novel report produced by the Quantitative Research area of RBC Dominion Securities, their 12-month estimated earnings from bottom-up analysis is $293 and a 148 P/E They note that TSE 300 recurring earnings (which adds back all restructuring charges and write-offs/gains) have surg almost 15% in the last three month with a hardy contribution from the larger cap TSE 100 stocks. These 100 stocks publicly make up approximately 82% of the TSE 300 aggregate earnings loch while their relative weight (based forward float market cap) within the 300 is approximately the same percentage.