How to Build a Price Target Sensitivity Table Using EPS and P/E
Calculate nine outcomes by varying EPS and the valuation multiple instead of relying on one price target. Learn the assumptions behind the middle and extreme values and the reference points to use when calculating upside.
A price target based on the P/E ratio (PER) is forecast EPS multiplied by the chosen multiple. Place these two assumptions in rows and columns to build a sensitivity table. The table reveals which assumptions drive the conclusion; it does not predict the share price.
Fix the earnings basis before filling in the table
Place three EPS estimates in the rows and three P/E multiples in the columns. First state whether EPS is for this year or next year and whether it is basic or diluted, then apply that basis to every cell. If the share count is expected to change, distinguish estimated EPS using the future share count from reported historical EPS. Instead of simply calling a multiple the industry average, support it with the comparable companies, valuation period, and differences in growth rates. If EPS is negative, do not force a P/E table; consider another valuation method based on revenue or cash flow.
The nine cells are not equally likely
Low EPS with a high multiple and high EPS with a low multiple can both be calculated, but they have different economic meanings. Applying the highest multiple to peak-cycle EPS can count optimism twice. The whole table therefore shows arithmetic sensitivity; separately identify combinations of assumptions that could realistically occur together as scenarios. The middle cell is not automatically the most likely outcome. If you assign probabilities, explain the chosen weights. If the evidence is insufficient, present a range instead.
Work backward to explain the current price
Find the cell closest to the current share price and work backward to explore the earnings and multiple it may reflect. Label this a possible explanation, since you have not directly observed investors’ actual expectations embedded in the price. Upside to a price target equals the target divided by the reference share price, minus 1. It differs from total return including dividends through the valuation date and trading costs. Update the table when earnings estimates change, retaining earlier versions so you can identify why the conclusion changed.
Worked example
Hypothetical example: Set EPS at KRW 2,000, KRW 2,500, and KRW 3,000, and P/E at 8x, 10x, and 12x. The first row gives values of KRW 16,000, KRW 20,000, and KRW 24,000; the second gives KRW 20,000, KRW 25,000, and KRW 30,000; and the third gives KRW 24,000, KRW 30,000, and KRW 36,000. Against a current price of KRW 25,000, upside to the middle value is 0%, the lowest outcome is -36%, and the highest is 44%. With EPS held at KRW 2,500, the current price requires a 10x multiple. These are hypothetical conditional calculations, not probabilities of reaching a target.
What to check
- State the EPS fiscal year and whether EPS is diluted above the table.
- Record the comparable companies and rationale supporting the multiple range.
- Check whether combining high earnings with a high multiple is reasonable.
- Distinguish price upside from total return including dividends.
Sources and primary materials
This is educational material about research methods. For an actual company decision, verify the filings and primary sources for the relevant period.