Valuation Evaluation Using Price-Earnings Relatives
by Wayne A. Thorp
The popularity of the price-earnings ratio stems from how it relates the markets expectation of future company performanceembedded in the price component of the equationto a companys actual recent earnings performance. The greater those expectations, the higher a multiple of current earnings investors are willing to pay for the promise of future earnings.
But price-earnings ratios are not across-the-board comparable in terms of value. How, then, do you judge whether a companys price-earnings ratio represents good value?
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