Two fundamental aspects affect the share price of any company, including Easyjet. One of them is the earning base, including the earnings per share (EPS).
On the other hand, there is the P/E ratio or any other valuation multiple. How do they affect the share price? There is only one way to find out, which is why you need to keep reading.
1. Earning Base
As a common stock owner, you get to claim on earnings. Equally important, EPS is a clear indication of return on investment that the owner gets eventually.
However, when the buyer buys the stock, what they have in mind is the earnings they will get in the future. While determining the future earnings, there are two things worth considering. One of them is the earnings, and the other is the expected growth over time.
Besides EPS, there are other ways to measure the company’s earnings power,including the cash flow. The measurement chosen usually depends on the company’s type most of the time. A specific example is Funds from
Operations (FFO) associated with the Real Estate Investment Trusts (REITs). If the company is relatively mature, the measure often considered is the dividends per share.
Consequently, if the earning base is great and promising, the Easyjet share price will most likely rise. Everyone wants to be associated with such a stock market, after all. Consequently, the demand rises, and the price follows suit.
2. Valuation Multiple
As much as the stock you buy today promises future earnings, both profit and loss are possible. Regardless, an investor takes the risk hoping that it will be a profitable deal in the future.
Depending on how much they believe in your dream, they are willing to pay something for it, and that’s precisely what valuation multiple is all about. It represents the discounted present value of the predicted future earnings.
Two main factors revolve around the valuation multiple. One of them is the earning base’s expected growth. The other one is the discount rate that comes in handy when calculating the future stream of the company’s earnings as a present value. Keep in mind that a high growth rate earns a stock a high valuation multiple.
At the same time, a high discount rate leads to a low valuation multiple. Several functions determine its value. One of them is the perceived risk, and the higher it gets, the higher the discount rate and the lower the valuation multiple.
The other function is inflation, and the proportion is no different from that of risk and discount rate. Under either condition, it is easy to tell whether the Easyjet share price will go high or low, no doubt.
The major factors affecting Easyjet share price are the current earning base and its expected growth in the future. It is also important to acknowledge the discount rate affected by both the perceived risk and the discount rate.
If the earning base is high and promising, the price goes high. On the other hand, a high discount rate means trouble as far as the share price is concerned.