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.
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