ANALYSIS FOR WAL-MART
income and dividing by the net asset value (book value per share), a potential investor can figure the current return to shareholders, which could be below that offered through competitive financial instruments. Second, the valuation of the assets could have appreciated significantly beyond the depreciated (historical cost) basis. Thus, if the assets are marked to market and net income is divided by a larger base of net assets, the return may not be competitive. An inadequate return could be remedied by selling assets or better utilizing the assets in order to earn a higher return.
A Bear Stearns strategy paper entitled "Don't Earnings Matter Anymore?" states, "In this century, with the exception of the early 1930s, variations in price/earnings multiples have dominated the movements in stock prices. Anticipating shifts in P/E--the value of earnings--is the dominant investment consideration for the stock market."