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moosegoose47 | Does a company have a better outlook with a high or low P/E? |
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Yarcofin
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I wouldn't say it's a very accurate way to tell a good company from a bad one. P/E ratio is just price/earnings. It's like you pay $100 for a business that makes $50 per year, it would have a P/E ratio of 2.0 because it will take you 2 years to make your original investment back.
When buying stocks, you should look for a low P/E ratio that will tend to suggest it is undervalued. You don't want to be buying things with a P/E ratio of something ridiculous like 200, like Google has been known to have
Basically it's just a "hype meter" in my opinion. |
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labare
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A high or low P/E does not give you an outlook of the future. It is a measurement of the existing performance vis a vis the share price. High p/e can mean good and bad. Good because investors may have confidence in the future like google, amazon and may be bad since investors may have too high hope in pushing the price too high. Again low p/e could also mean good and bad. Good because others have not seen it yet of the share price being unrealistically low or bad since investors do not hope much of the prospect.
You have to search from other measurements especially on growth prospect of sales, market position, performance and financial structure in sustaining the growth.
Many have made mistakes by relying on only P/e measurement especially among those new investors. |
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Dave W
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Generally, a high P/E means investors think the company is going to grow earnings rapidly and a low P/E means the expectations for growth are lower. P/Es vary a lot by industry though so an oil company stock (which generally has lower P/Es) with a P/E of 8 might actually have brighter prospects than a technology company stock (which generally has higher P/Es) with a P/E of 15.
Be aware that a good outlook for the company does not necessarily mean a good outlook for the stock. Here's one great example...
On July 28, 2000, the last day of Cisco's 2000 fiscal year, the stock closed at $68.56. The P/E was about 190 based on the actual earnings of 36 cents per share. Investors obviously thought the outlook was bright - VERY VERY bright.
Over the next seven years, Cisco's sales nearly doubled and earnings per share more than tripled so the company has in fact done very well. The stock? Down nearly 58%. Why? Because even though the future was bright, a P/E of 190 reflected irrational and completely unrealistic optimism. Had the stock been trading at a P/E of 25 back in 2000 (which would have been reasonable given the expected growth), the stock would have been at $9 and poised to rise 222% over the next 7 years in unison with the earnings growth.
So when evaluating the P/E of a stock, always make sure it's in line with a reasonable expectation of company earnings growth or you could lose a lot of money even if the company does well. |
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Andy
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Forget P/E when evaluating individual stocks, unless the P/E is grossly out of line with its industry group. The question is revenue and earnings, again, relative to the other stocks in the same industry group and sector. You want growing revenue and earnings. A company's P/E will also reflect the condition of the overall market; for the S&P 500, overbought is a P/E over 18; neutral 14; oversold 10, approximately. |
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d m
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price to earning ratio.
Divide the price of a share by its earnings (dividend) and that is the P/E ratio.
1) Suppose a share is priced at 100 and it earns 10 a year, then the P/E ratio is 100/10 = 10. So in 10 years you will have earned back the 100 you spent for the stock. That does not account for inflation: the 10 you earn in the last year is of less value than the 10 you earn in the first year. Nor, for fluctuations in the dividend: it may go up and down and down and up, up, up and .... you just can't predict the future.
2) Suppose the P/E ratio is 100/50 = 2. Then all things being equal as in (1) you get your investment back in 2 years.
So the lower the P/E the better it is. Except, there is the potential for changes in stock prices.
3) Suppose as in (1) your purchasing P/E is 100/10. But you hold on to the stock for 10 years and at the end the 10 years the price is 250. So all things being equal, you have earned the price of the stock back plus, the value has increase by 150. A total potential profit of 150.
4) On the other hand, suppose as in (2), the stock increases in price to 90: at the end of two years, all things being equal, you have recouped your 100 investment but if you sell, you lose 10.
So, while a low P/E is good, it is not the only thing to consider. Price performance is also important.
This is why brokerage houses, Merrill Lynch, Goldman Sachs, and the rest hire PHD mathematicians/statisticians and pay them fantastic salaries. So that they can make as much money as possible on their own corporate accounts. While the factors that effect P/E and price performance are many, they try to model market behavior. If they succeed the brokerage houses, from time to time, make a bundle. If they don't they lose a bundle.
However, from an individual stock brokers perspective when they market goes up, they make a bundle on commission since people are buying. When the market goes down, they make a bundle on commission because are people are selling. So, don't forget to include commission in your calculations of P/E and your expectation of a stock price going up or down. |
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jeff410
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As you can see by the responses, P/ E is in the eye of the beholder. It depends on the industry. Some traditionally have lower P/E's and some higher. To understand a company you have to go much deeper than P divided by E. |
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cnrage
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It isn't necessarily an indicator of "better." The P/E ratio is a company's stock price per share divided by the company's earnings per share. Put another way, the P/E ratio is a multiple of a company's earnings per share.
Some investors consider a lower P/E ratio to be "better." By this I mean the company with a low P/E ratio may be considered to be undervalued.
An example will help clarify this. If you have a stock price that is $100 and earnings per share of $10...then you have a P/E of 10. If the stock price is $200 and the same earnings per share you have a P/E of 20.
In other words, with a P/E of 20, investors are indicating that they will pay $20 in stock price for every $1 of earnings that a company generates. Generally, investors look for a lower P/E ratio when investing. It means that you may be getting the stock on sale. I would say a P/E of 15 or below is generally considered to be low. When you get up to 25 + you may start wondering if there are other factors besides the basic financial strength of the company that is driving the stock price up...such as emotion, different market factors, etc.
Kind of long-winded there, hope that helps you understand! |
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ezelion
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That’s a loaded question. The PE of a company holds many secrets ;-)
The PE effectively represents what someone is willing to pay over what the company earns in the course of doing its business. A higher PE represents a willingness to pay a higher multiple over its profit with the anticipation of a greater future profit or larger market share earned by that company.
High-growth industries and companies usually command a higher PE, e.g. Google, where investors are willing to pay more because they expect the company to keep growing and what they pay today, will look cheap in the future if the company keeps growing as they think it will. For example, if a company commands a PE of 50 today, and is doubling profit every year, if the stock price stays constant, the PE will be 12.5 two years down the road, which looks cheap!
Traditional, mature industries, like steel and banks, command lower PEs because they operate in saturated markets, and profit growth will usually be fairly gravity-bound, steady and predictable, driven only by efficiencies or price movements.
In boom times for high-growth industries, high PE stocks are in favour, and low PE stocks aren’t, and vice versa when bubbles burst and high PE companies get a reality check and come crashing down, such as the dot-com bust in 2002.
PE’s also hold other secrets. A badly managed company, or one which is expected to fail or run into hard times, may command a low PE because investors aren’t willing to pay more for what the company earns today, because they expect it to earn even less tomorrow.
Low PE companies can also be a good indicator of value, if you get into them just before a cyclical growth phase or commodity boom, where they start to grow like growth companies, but you bought into them cheap.
In short, a PE is one of the most reliable and informative indicators to look at when you make an investment, but it should definitely not be the only one. Look at market research, earnings estimates, peer valuations, and your own gut feelings to see if you expect a company to grow at or more than the PE the market has priced it at and the risk you’re willing to, or can take. A low PE is not necessarily safe, just as a high PE isn’t always a gamble. People said Google was overpriced when it went public at $50 a few years ago. It’s at $600 now and people say it’s cheap and has lots of growth left.
Stay away from the herd though, because when they cry the loudest, they’re often closest to the edge of the cliff. Investing is a calculated risk, and that’s what earns you your reward. |
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