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Question 4.22: Other Comprehensive Income in Analysis An analyst is looking...

Other Comprehensive Income in Analysis

An analyst is looking at two comparable companies. Company A has a lower price/ earnings (P/E) ratio than Company B, and the conclusion that has been suggested is that Company A is undervalued. As part of examining this conclusion, the analyst decides to explore the question: What would the company’s P/E look like if total comprehensive income per share—rather than net income per share—were used as the relevant metric?

Company A  Company B
Price $35 $30
EPS $ 1.60 $ 0.90
P/E ratio 21.9x 33.3x
Other comprehensive income (loss) $ million ($16.272) $ (1.757)
Shares (millions 22.6 25.1
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As shown by the following table, part of the explanation for Company A’s
lower P/E ratio may be that its significant losses—accounted for as other comprehensive income (OCI)—are not included in the P/E ratio.

Company A Company B
Price $35 $30
EPS $ 1.60 $0.90
OCI (loss) $ million ($16.272) $ (1.757)
Shares (millions) 22.6 25.1
OCI (loss) per share $ (0.72) $ (0.07)
Comprehensive EPS = EPS + OCI per share $ 0.88 $ 0.83
Price/Comprehensive EPS ratio 39.8x 36.1x

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