The price-earnings (P/E) ratio reported in the press and in broker estimates looks high, but is it a true measure of ECO’s value?
Licences are intangible assets that can be sold and transferred to any willing buyer. These assets are commonly valued as a multiple of the gross margin that the licence has generated or is expected to generate over 12 months. With the cost of bringing a new drug to market for food animals currently being in the order of $200m and taking up to 15 years, it is easy to understand the asset value of an existing tradable licence.As our sales and the profits generated have increased, so has the asset value of our licences.
The Company is obliged under IFRS accounting rules to amortise the cumulative cost of obtaining licences over their conservatively estimated useful lives. So far we have spent £60 million in order to obtain a total of over 600 licences. The amortisation deducted from our post-tax profit on ongoing activities for the 12 months ended March 31st 2016 amounted to £2.6 million, leaving profit for the period at £6.7m. Without this non-cash deduction, the profit would have been £9.3m and the P/E ratio would be proportionately lower.