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Support Ticket 18: Relative Value in Toolkit 6
Rank: Administration
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I'm posting this up based on a couple of questions that have come in over the last week or two on the Relative Value (RV) figures used in Toolkit; specifically the fact that the RV on the Portfolio Report Card and Portfolio Reports are not the same as the RV on the back of the SSG.
The Relative Value (RV) figure in section 3 of the SSG is a historical value based on the Average High and low P/E figures that appear on line 6 of section 3. The RV figure on the Portfolio Report Card and Portfolio Reports use the Selected 5 year High and Low P/E figures from Section 4 of the SSG to help project if the company would retain it's value based on your judgments.
Here is the basic formula for calculating Relative Value (RV):
RV = (Current PE / Average 5 Year PE) * 100
On the back side of the SSG, the Average 5 Year PE formula is:
(Avg5YrHighPE + Avg5yrLowPE) / 2
On the Report Card and Portfolio Reports, the formula for the Average 5 Year PE is slightly different:
(SelectedHighPE + SelectedLowPE) / 2
Note that the Projected Relative Value on the back of the SSG uses the same formula as the Relative Value, except that instead of Current PE, it uses Projected PE.
Since this involves the Future Twelve Months (FTM) figure, the Projected Relative Value is only meant to apply to the next 12 months.
Both the Toolkit 6 Help file and the .pdf copy of the manual have more on the use of Relative Value in making a judgment, if you check under the sections on Relative Value and Projected Relative Value.
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Rank: Advanced Member
Posts: 105
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> Both the Toolkit 6 Help file and the .pdf copy of the manual have more on the use of Relative Value in making a judgment, if you check under the sections on Relative Value and Projected Relative Value.
What I can't find in the Toolkit 6 manual (or elsewhere) is a discussion of *why* Relative Value in the Portfolio Review (formerly PERT Report) and the Portfolio Report Card are calculated differently from each other and differently than in SSG section 3. Or, why the calculation of Relative Value in the Portfolo Report Card (and Portfolio Summary) is different than in Toolkit 5 (where it was the same as Proj. RV on SSG). In short, why does Toolkit 6 calculate Relative Value in four different ways?
Can you address those issues, please?
Here are the four different Relative Value formulas used by Toolkit 6.
SSG Section 3:
Relative Value = Current P/E Ratio / Average P/E Ratio
Proj. Relative Value = Projected P/E Ratio / Average P/E Ratio
Portfolio Review (was "PERT Report" in TK5):
Proj RV (col R) = Proj P/E (col P) / Avg Proj 5 Yr P/E Ratio (col T)
Portfolio Report Card (and Portfolio Summary):
Relative Value (Rel Val) = SSG Current P/E Ratio / Avg Proj 5 Yr P/E Ratio (col T on Portfolio Review)
(This is different from Toolkit 5 where it was the same as Proj. Relative Value on the SSG.) -Jim Thomas
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Rank: Administration
Posts: 255
Thanks: 3 times
Was thanked: 11 time(s) in 11 post(s)
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Hi Jim,
I was out for a few days, but let me give Doug a virtual tap on the shoulder, and ask him to take a look at this.
Thanks,
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Rank: Administration
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The short answer is that the SSG is primarily backward-looking and the portfolio reports are purely forward-looking.
The RV column in the PERT Report in TK5 never matched either the RV or Proj RV on the SSG, since it was calculated as you describe above using a Projected PE Ratio calculated using the user's projected high and low P/E ratios from Section 4. The idea is that a stock in your portfolio should be evaluated on a "that was then, this is now" basis, using your expectations for the future as a basis of valuation.
We are planning to adjust the Report Card and Summary in the next TK update to match the "RV" figures to the Portfolio Review Proj RV figures. I'd like to come up with a way to label these so that they make sense, too....
Doug
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Support Ticket 18: Relative Value in Toolkit 6
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