The three most important valuation techniques - P/E
4 important questions on The three most important valuation techniques - P/E
What does the P/E ratio express?
What is the inverse of P/E? What does it say?
What are four advantages of a P/E valuation?
- Very simple
- Only two moving parts: share price and earnings estimate
- Easily comparable to bond yields (inverse P/E = E/P)
- Vastly available, i.e. Free websites publish analyst earnings estimates for years ahead
- Higher grades + faster learning
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What are three disadvantage of a P/E valuation?
- Difficult to compare companies, which are subject to different financing structures, or which have different other liabilities (e.g. Pension funding gaps, off-balance sheet liabilities, etc.)
- EPS is an accounting figure and says little about the actual cash flow to shareholders.
- EPS can be boosted by one-off gains or other activities, e.g. Financing speculation, sale of assets, reversion of provisions, share buybacks, etc.
The question on the page originate from the summary of the following study material:
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