Why Investment Banker and Equity Research Analyst prefer Band Charts?
Band chart Sample data
While working as a equity research analyst, we make various valuation related graphs. The above data can be used to make the Price to Earnings Graph (PE graph). We can plot the historical PE ratios. However, just the PE ratio graph may not give us the required interpretation.
We may look at even a better version of the PE ratio graph known as Band Charts which is essentially made on the same data.
What are band charts?
Band Charts are also made on the same data as the Ratio Charts. However, the Y-axis of band charts provide the Price Per share as compared to PE ratio as given in the Ratio Graph. This kind of a graph is one of the most important graphs used by Research Analysts for their reports. The Band is drawn between the maximum PE and the minimum PE for the stock.
The excel download explains you the investment banking basics of Band Chart. The following Steps are employed for making the Band Chart –
Step 1 – Download from Bloomberg or other related databases, the Price and the forward EPS for historical data
Step 2 – Calculate the PE ratio for the historical data
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Step 3 – Calculate the average, maximum and the minimum of the PE ratios
Step 4 – Find the implied price at average, maximum, minimum PE ratio using the following formula
- Price (corresponding to Average) = Average PE x (Historical EPS)
- Price (corresponding to maximum) = Average PE x (Historical EPS)
- Price (corresponding to minimum) = Average PE x (Historical EPS)
- For better visual effects, you may like to add one PE line between maximum and average (called as Upper) and likewise a line between minimum and average (called as Lower)
Interpretation of Band Charts
Currently, the Price Line (colored in BLUE) is touching the Maximum PE Band Line of 20.2x. If we trace backwards the Maximum PE Band Line till March’02, we find the Price range at which the stock would have traded. For example, as of March’02, the stock would have traded at Rs600/- if the PE of the stock at that point in time was 20.2x
For solved excel sheet click at below link :[download id=”465″]
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