Should i buy
It is said to buy a company's shares when its p/e ratio of less than about 20 [ for investing not trading} . But i have a few questions regarding it
1} Is It good for a company to have a small ratio ?
2} what if the ration is less than one?
3}Is it worth Buying a company With P/E ratio less Than one?
P/E, EV/EBITDA - They are all multiples that need to be analyzed comparatively. Meaning, you need to assess the ratios of a company and its peers to see if it is trading at a discount or a premium.
cheers.
although the P/E ratio tend to be a commonly used indicator of undervaluation. it must be understood that the P/E ratio is not an absolute indicator of under valuation due to several reasons:
1) earnings is based on previous year's earnings (historical) and hence not reflective of the current state of the company
2) P/E ratio should not be based off the value of "20" or "15" but instead compared to the industry which the company finds itself in
3) a company with a P/E ratio less than one tend to be a penny stock and hence greater diligence has to be done to ensure that the company is fundamentally sound before making any investment decision
multiples are all about comparing with other comp's.
there's no right or wrong answer should there be no comparable.
1) Generally, yes, low PEs are a positive attribute. But, a low PE might mean that the market has low expectations of future growth. For instance, a dial up modem manufacturer or newspaper company might have a low PE. Likewise, blue-chip, establsihed firms are likely to have low PEs, just because they cannot realistically grow quickly on a % basis: Exxon has a PE of ~10.
2) It should never be less than one for any meaningful length of time. It takes a one time event for that to happen, like a company selling off a major division, under investigation for massive accounting fraud, or facing imminent bankruptcy.
3) Find out why the company has that PE ratio...it is probably not good. For instance, remember Sino Forest? Its PE was below 1 for a while.
Is this a homework assignment or something? In any case, I'll add that comps only work if the peers are fairly valued. For instance, a lot of financials are trading far below historical values.
thanks a lot guys!!!! Learnt loads from you. Was just reading Intelligent Investor by Benjamin Graham. I had some doubts so thought this place was the best to ask. Thanks again
I guarantee you Benjamin Graham answered all these questions in his book
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