got asked this in an interview today.
Suppose Company A and Company B have the same income statement down to operating profit, operate in the same industry, and everything else is essentially the same (balance sheet, statement of cash flows, etc). However, Company A has a P/E ratio of twice that of Company B. Why might that be the case?
Just curious.
| +230 | Should My Intern Get a Return Offer? | 58 | 2d |
| +106 | UBS Accused of Favoring H-1B Workers While Cutting U.S.-Born Employees | 18 | 45m |
| +79 | Incompetent and annoying co-intern | 23 | 19h |
| +68 | Getting Laid in IB? | 28 | 3d |
| +66 | Intern keeps sleeping at work - what to tell them | 28 | 22h |
| +55 | Living in greenwich as an analyst? | 12 | 18h |
| +42 | NYC Associate Budget | 14 | 23h |
| +36 | Nauseous every morning for past 3 years in IB, anyone else? | 21 | 1d |
| +36 | Quick Thoughts on CVC AI Sale Process | 7 | 1d |
| +29 | Going out / social schedule as AN1 | 14 | 3d |
Career Resources
Get instant access to lessons taught by experienced private equity pros and bulge bracket investment bankers including financial statement modeling, DCF, M&A, LBO, Comps and Excel Modeling.
Some intangible reason, maybe everybody thinks that company B has shitty management, their biz plan is shit, they just got sued, their drug patent got shot down, etc; something that affects the "feeling" about the company enough to make it trade at a lower P/E than A
Growth prospects for the companies might be drastically different.
If cashflow statements are identical, that rules out one having higher interest expense than the other. Also rules out one having some type of tax shield or advantage.
Yeah I guess growth is the only tangible reason I can think of off the top of my head
What drives multiples are growth and returns (usually measured by ROIC or some RO_ metric). Even though they may have had the same results and same balance sheet, if expectations of future returns and future growth are lower for company B (for one of the reasons olafenizer expressed, like bad management, bad business plan, etc.) the co. is going to trade at a lower multiple.
The answer they were fishing for is that the two companies probably have different capital structures.
The reason that equity multiples are such a bad idea is because when a company has debt, equity value does not grow linearly with net income growth. Equity value actually grows faster than net income. So you wouldn't want to try and calculate equity value as a multiple of net income, because it would give you incorrect results.
Confidence in the management
Reiciendis earum enim quaerat suscipit est saepe maiores. Inventore fugiat quo rerum nemo praesentium eius praesentium. Pariatur minima nulla qui voluptatem ipsa.
Nisi aut fugit est inventore ea voluptas cumque eius. Neque voluptate dignissimos architecto odit quia aperiam facilis voluptatem. Harum deserunt cumque expedita et voluptatibus necessitatibus. Ut quo repellendus sit cupiditate quibusdam eos. Doloremque quis ut similique qui aut est aliquid.
Architecto minus rerum non officia amet. Et quia non accusantium asperiores. Nobis veritatis autem et omnis ea ipsa. Tenetur eos in maiores provident in sit. Ut incidunt ad quas est repellat dolor quia minus.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...