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.

Category:

Education

Tags:

• saving
• investing
• savings
• investment
• money
• earnings
• valuation
• P/E
• funds
• stock
• market
• Michael
• Fischer
• savingandinvesting.com
• finance
• economy

[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.

[seanpeso]

are P/E ratios always based on a yearly basis?

[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.

[orangedac]

@savingandinvesting

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.

[seanpeso]

yes thanks michael that helped alot

[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.