V2. The P/E Ratio

The first valuation method is detailed in this video - the P/E ratio. Often referred to and spoken about - it is certainly worth knowing what this valuation method involves - in terms of both advantages and disadvantages.

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  Education

[orangedac]

What would you say is a reasonable P/E number for stocks in general? Is it 17?

I want to short a stock that has a ridiculously high P/E of 100+ but I don't understand how it could have got & stayed so high in the first place. What explaination is there for a company which has a high P/E yet it stock is holding its ground?

[savingandinvesting]

Reasons for such high ratio include: - earnings depressed in particular year, expectations of strong Earnings (E) growth in future yrs (in both cases, P/E much lower then on N Year), earnings not yet there as in early phase of life cycle or investment phase, or it could just be that co. is expensive although often one of the other reasons. The reasons highlight issues with P/E ratio - might want to look at another (multi-year) val. method like DCF. Valuing stocks comes with lot of uncertainties.

[freezazoid]

I'm a little slow, sorry. So if a year ago a stock was at 80 and currently it's at 100.... Do I divide 80/20 or 100/20?

[savingandinvesting]

Neither - if a company has a stock price of $10, and earnings per share of $2, then the P/E ratio is 5. Alternatively if a company's market capitalization (market value of equity) is $10bn) and the Net Income (Earnings) are $2bn, the P/E ratio is 5. Helpful?

[freezazoid]

okay, sorry to be annoying but, I thought the P/E ratio was over any give ANNUAL period of time so what I'm saying is: do I take the CURRENT price the stock is at and divide it by it's earnings over the last year or do I take the price it WAS at a year ago and divide it by it's earnings over the next year?

[savingandinvesting]

Current price and earnings this year for 'P/E on this year's earnings'; or next year's earnings (and current price) for 'P/E on next year's earning's' or 2011 earnings for 'P/E on 2011 earnings' etc. The earnings have drawbacks, the fact that only one year is used (and many times people don't even specify which one (but should use same for 2 cos)) and the fact that earnings can really vary also due to non-operating issues makes ratio interesting/often used, but very incomplete as far valuation.

[mrsonibros]

good video, i also have a p/e ratio video that is quite similar to this.

[kitty marwii]

thank you very much i understood it way better after this video ^_^

[orangedac]

Take a look at HOG. how does its 100+ p/e make any sense. An almost 5 billion dollar company making just 77 million in profits? It made a loss last quarter yet its shares are going up? Whats going on. It fits the bill to short this stock but I can't help but feel I'm being suckered in.

[savingandinvesting]

Yes - this next year's earnings, this year's earnings or even trailing earnings. As long as the same year is used for each company comparison can be made subject to many drawbacks as noted in video: only one year used, earnings can be affected by one-off items, taxes, interest charges etc. Hope that helps, best regards, Michael.

[complience]

yes but ultimately boring.

jazz it up a little

[karthikh80]

lucid, logical and very well done

not just this video..but all of the related videos....great work

thanks a lot

[Ostermeister]

Really very good mate! Thx

[xraymond10]

Your videos are very nice -- straightforward, no BS and you say it all.

Good job.