I think it’s like any metric. In isolation it’s not great, but used in context while also using other financial metrics gives it some use. Valuing companies is an art and a science, and PE’s are one helpful ingredient that shouldn’t be overly used.
Valuing companies based on a multiple of their EPS is a common (popular) way to approximate how much a company is worth. I agree with you, in part, it is like any other metric, I think because all metrics in effect give you is a snapshot of a company's picture at a point of time. Metrics don't tell you with assurity what the future will bring to a company - although some other metrics (just data) will try to hint at that. Metrics tell everything about a company at a specific point in time, in the past. I disagree with you, in part, because PE isn't like a Book Value metric, which hints at the question - how much is a company worth if it were to go declare Bankruptcy tommorow? The P/E truly sucks at giving that information. Forward looking though, the ability to and promise to pay the next dividend is worth something; and perhaps if all future dividends could be known from the life of a business up to its final liquidation value - then perhaps the Dividend Discount Model is the best tool for valuing that future income stream in today's dollars, giving it a value above its fair book value, I think.
Thanks for the advice. I just finished a semester in Managerial Accounting part of an MBA and learned all about the financial statements which now I realized has helped me more easily understand the financial market.
I kinda like the slight dirty language. I can feel your frustration with that indicator :) I just wish you could go over the last example together since it is your favorite and you think it is the most exacting and maybe not go through the math with less accurate. Great episode though - Thanks
Thanks for sharing the limitations of PER and suggesting alternatives. Numbers by themselves are so "easy" to use, but without context are usually meaningless (i.e., can be made to "mean" anything). Nice reminder that homework for investing should be both qualitative and quantitative. BTW, which statistics have been defined by recognized organizations. I believe FFO has been defined by NAREIT, but AFFO depends on the company. Are there others?
Too right! Saw a comment on Facebook that Peter Lynch says he uses the PE ratio...but what most people don't realize is that analysts 'adjust' the income statement for all the accounting shenanigans used by companies. FFO is a good one for REITs. DCF is used for MLPs.
Hi Joseph, excellent video! Would you mind taking a look at my thought process and seeing if I'm on the right track? Target (TGT) Walmart (WMT) P/E 18 25 Past 5 Yrs Aver 14.44 24.43 % Diff Average 26% 1% P/S 0.72 0.66 P/B 4.69 4.9 P/CF 9.15 12.36 I wanted to compare TGT and WMT from a value perspective. I calculated the PEs for TGT and WMT and first compared them since they are industry peers. Looks like using that, TGT looks a little cheaper. But then like your video discussed, does that mean it's actually cheap in of itself? I pulled the 5 yr PE averages, and it looks like TGT is actually about 26% above its historical PE! WMT is more in line with where it has been trading. Now I suppose that P/E could be warranted because it's recent growth has investors willing to pay a premium. Any thoughts on this aspect? P/S looks roughly similar with WMT a bit cheaper. P/B about the same as well. P/CF (nice and clean!) looks to clearly show you make a better move from a CF perspective picking TGT. I think given the P/CF and P/E relative to WMT (even though it is above it's historical average) seem to show TGT the better value play. Seriously appreciate any feedback and subscribed! Look forward to watching more on your channel. When I saw that CFA title on your video, I knew I found the right resource! Thanks!
Well thought out. Target struggles more with growth so its valuation multiples are going to be lower. That said, both look a little pricey right now though WMT not terribly expensive.
seriously...u explained very well.. but I agree all of these can be fudged... one need to do deep analysis... P/Rev can be wrong is company is selling on Credit.. so every info has to be checked.. It's not so easy as I had thought..
It's useful but as multi-valuation model process. Problem with DCF is that so much depends on the long-term growth estimate. More useful for mature companies
Great video. From what website did you get the 'Average PE Ratio for each Sector'. I have been looking but have not been able to find a website that will give that information.
The conclusion implies an interesting contrarian style of investing...closely watch the higher PE stocks for expected bad news and failing price support levels.
You never explained what to do or look for with the other ratios. I thought you were going to give a valuation comparison example to show what the P/E missed.
Sorry, thought I covered it in the video. Use the other price multiples like P/S and price-to-cash flow measures. These are less easily manipulated. Enterprise Value to Revenue is another good one.
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like tesla p/e 1,800 rn
I think it’s like any metric. In isolation it’s not great, but used in context while also using other financial metrics gives it some use. Valuing companies is an art and a science, and PE’s are one helpful ingredient that shouldn’t be overly used.
Valuing companies based on a multiple of their EPS is a common (popular) way to approximate how much a company is worth. I agree with you, in part, it is like any other metric, I think because all metrics in effect give you is a snapshot of a company's picture at a point of time. Metrics don't tell you with assurity what the future will bring to a company - although some other metrics (just data) will try to hint at that. Metrics tell everything about a company at a specific point in time, in the past. I disagree with you, in part, because PE isn't like a Book Value metric, which hints at the question - how much is a company worth if it were to go declare Bankruptcy tommorow? The P/E truly sucks at giving that information. Forward looking though, the ability to and promise to pay the next dividend is worth something; and perhaps if all future dividends could be known from the life of a business up to its final liquidation value - then perhaps the Dividend Discount Model is the best tool for valuing that future income stream in today's dollars, giving it a value above its fair book value, I think.
*Thanks for going over this as well as the comparison of stocks especially in similar fields.* 👍
Thanks for the advice. I just finished a semester in Managerial Accounting part of an MBA and learned all about the financial statements which now I realized has helped me more easily understand the financial market.
Great video! Mind blowing! I will definitely need to go over this a few times!!
Bow tie nation,I love it!!!!! Thanks for the great video Joseph
Excellent video, I never knew what these accounting terms meant.
End screen links work! Missed this one when you released it. Nice refresher on P/E ratios.
I like looking at levered free cash flow myself.
Thank you.
5:51 I think you only need to know one thing: it's already priced in.
I would have loved it if the chart at 0:58 scale zoomed in, changed scale to focus on 1960 forward , then 2008 forward.
Are you on Nickelodeon? You look like that famous guy and sound like him. Serious question... I can't remember the name but the kids LOVE that show!
man thank you for helping the world.
Good on ya bro 💵💵💵🫡
Amazing video. Thank you very much.
I kinda like the slight dirty language. I can feel your frustration with that indicator :)
I just wish you could go over the last example together since it is your favorite and you think it is the most exacting and maybe not go through the math with less accurate. Great episode though - Thanks
Thanks for sharing the limitations of PER and suggesting alternatives. Numbers by themselves are so "easy" to use, but without context are usually meaningless (i.e., can be made to "mean" anything). Nice reminder that homework for investing should be both qualitative and quantitative. BTW, which statistics have been defined by recognized organizations. I believe FFO has been defined by NAREIT, but AFFO depends on the company. Are there others?
Too right! Saw a comment on Facebook that Peter Lynch says he uses the PE ratio...but what most people don't realize is that analysts 'adjust' the income statement for all the accounting shenanigans used by companies. FFO is a good one for REITs. DCF is used for MLPs.
Hi Joseph, excellent video! Would you mind taking a look at my thought process and seeing if I'm on the right track?
Target (TGT) Walmart (WMT)
P/E 18 25
Past 5 Yrs Aver 14.44 24.43
% Diff Average 26% 1%
P/S 0.72 0.66
P/B 4.69 4.9
P/CF 9.15 12.36
I wanted to compare TGT and WMT from a value perspective. I calculated the PEs for TGT and WMT and first compared them since they are industry peers. Looks like using that, TGT looks a little cheaper. But then like your video discussed, does that mean it's actually cheap in of itself? I pulled the 5 yr PE averages, and it looks like TGT is actually about 26% above its historical PE! WMT is more in line with where it has been trading. Now I suppose that P/E could be warranted because it's recent growth has investors willing to pay a premium. Any thoughts on this aspect?
P/S looks roughly similar with WMT a bit cheaper. P/B about the same as well. P/CF (nice and clean!) looks to clearly show you make a better move from a CF perspective picking TGT. I think given the P/CF and P/E relative to WMT (even though it is above it's historical average) seem to show TGT the better value play. Seriously appreciate any feedback and subscribed! Look forward to watching more on your channel. When I saw that CFA title on your video, I knew I found the right resource! Thanks!
Well thought out. Target struggles more with growth so its valuation multiples are going to be lower. That said, both look a little pricey right now though WMT not terribly expensive.
seriously...u explained very well.. but I agree all of these can be fudged... one need to do deep analysis... P/Rev can be wrong is company is selling on Credit.. so every info has to be checked.. It's not so easy as I had thought..
SO True.
Great video. Could you do a review on the Shiller P/E and CAPE ratios?
Great idea. Maybe a little more relevant than the market PE but still prone to the same company-level problems. Will put a video together.
How about the DCF model? What are your thoughts on it?
It's useful but as multi-valuation model process. Problem with DCF is that so much depends on the long-term growth estimate. More useful for mature companies
@@josephhogue Thank you sir
Great video. From what website did you get the 'Average PE Ratio for each Sector'. I have been looking but have not been able to find a website that will give that information.
It's from the Factset Earnings Insight download
@@josephhogue Awesome. Thanks.
Interesting how each of the three alternatives to the P/E ratio uses one of the three main financial statements.
Joseph, PE Ratio analysis to a long sewer. I liked that, and it's true sometimes. Thanks
The conclusion implies an interesting contrarian style of investing...closely watch the higher PE stocks for expected bad news and failing price support levels.
How do you find number of shares issued?
You never explained what to do or look for with the other ratios. I thought you were going to give a valuation comparison example to show what the P/E missed.
Sorry, thought I covered it in the video. Use the other price multiples like P/S and price-to-cash flow measures. These are less easily manipulated. Enterprise Value to Revenue is another good one.
not really get it. I think if you have a blackboard to right it down will be a lot better.
6:38 what website is this?
Sectorspdr.com tracker
@@josephhogue thanks!
I thought apples P/E ratio is high but then I checked teslas P/E ratio lol
Thank you. Very helpful video.