Forum Archive Index - December 1999

[Michael Sprott <MSPROTT@clear.co.nz>]

Hi Rini,

As you say the PE ratio is just one of many factors. If you believe in
traditional finance theory (Efficient Market Hypothesis) all shares move
quickly to their correct price based on the markets valuation of that
company and it's future earnings potential.

The PE of a share therefore just reflects the markets expectation of a
companies future growth - high tech stocks at the moment are trading at
ridiculous PE ratios based on the markets expectations of those companies
future growth potential whereas companies in mature or declining markets are
at levels between 6 and 15.

PERs should only be used as one of many tools to value a companies
likelihood of gain. I personally tend to favour low PER stocks which look
like they have growth upside in the future - not always easy to do in the NZ
market due to lack of information about companies here.

ms

> -----Original Message-----
> From: Rini H [SMTP:the4rs@ihug.co.nz]
> Sent: Wednesday, December 15, 1999 10:41 PM
> To:   sharechat@sharechat.co.nz
> Subject:      [sharechat] PE Ratio - higher or lower?
> 
> I've followed the PE ratio discussions with interest.
> It is a useful indicator to value a company, negative PE means the company
> suffered LOSS?
> 
> Somehow there are different opinions from sharemarket  experts:
> First opinion: the lower the ratio the better, example: PE ratio = 8,
> means
> it takes only a multiple of 8 times the share price to invest in that
> company. While PE ratio = 60, means you pay for 60 times the share price,
> thus more expensive to invest in that company.
> 
> Second opinion: the higher the ratio the better. The companies with high
> PE
> Ratio have more positive outlooks (such as many US stocks have PE more
> than
> 60).
> 
> Valuation of share price depends on many other factors as well, but what's
> your opinion regarding PE Ratio?
> Do you go for a higher PE or a lower PE?
> 
> Rini
> 
> 
> 
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