Watch PE when valuing a company

[freedom]

One basic point is that when we calculate P/E, we would eliminate the exceptional items, which is unlikely to repeat, such as inventory write-down(write-off)/gain(loss) on disposal, etc.

still, earning gives a better picture for long term investment than FCF.

[Bibi]

Next week, I will show the performance of consistently buying a basket of low PE stocks over a period of 22 years.

Few years ago, she did a comparison on portfolios comprising of a basket of
1) lowest PE,
2) lowest PB,
3) 52 weeks low stocks
4) 53 week high stocks
5) highest PE,
6) highest PB

and the one that came out with top performance is lowest PB.

[Temperament]

Actually for newbies or beginners or layman, they usually learn the importance of P/E. first. If they see company with not applicable P/E or stratospheric P/E they will avoid the company with all means. As he progresses in his learning that's where the fun begins. He get more and more confused or unsure. Why after learning what is a Balance Sheet, Income statement and Cash Flow statement and combining all of them together, he still can not be sure he will make money from buying the company? Well at least at a past certain point of time he knows whether the company was "sound" or not. Right now he can not be 100% sure. Going forward, your calculated guess is as good as mine. No?

[Musicwhiz]

Just to be clear - I want it be known that I have a lot of respect for Teh Hooi Ling and her articles, and also her efforts to educate the man in the street about investing and personal finance.

In fact, I think what she is doing is very admirable - my only criticism (if it can be called that) is that she's too good at churning out data using mechanical methods and back-solving problems. Using a basket of stocks with low P/E, P/B or whatever is good from a historical standpoint to analyze what used to work, but can it work moving forward?

I also have an issue with the quantity of data crunching - it seems she is focusing on the forest (i.e. the stock market) and ignoring individual trees (companies).

Other than that, I think her articles contain a lot of interesting insights!

[Temperament]

Yes! when we see only the Net Earning fig of this year higher than last year, no one can be sure the company is definitely doing better. There are still so many things to find out why Net Earning is higher? Another words we can not take a single ratio or data and think the company is doing well. In fact checking the quality of earnings is very important.
Having saying these, i am very lazy. i always try not to do "homework" unless force too. i depend on what Mr. Market tells me. i only have to think what Mr. Market tells me is acceptable or not.

[Greenrookie]

When I started off, I look at PE and PB, then I start to look at ROe, ROA and FCF. Then I released I need to look at these in terms of trends and in relative comparison of these with their compeitiors, plus margins inventories turnover, receivables turnover.

Now, I move on to look at executives ppl profile, remuneration and possible info on suppliers and customers.

When I start off, an Analyst report and a historical price chart is enough for me to initiate a buy position. Now, I took at least weeks digging up reports and whatever info I can find online. But, I still feel inadequate as I can't scuttlebutt effectively...

Guess there is no end to research to a company to find a truly undervalued counter, most of time I am staring at the pluses and minuses of what I found out and realized that the hypothetical undervalued price, one with high safety margin might never come... So, cash and portfolio balancing become important. No end to learning. It is and never going to be a magic matrix for investment. The more I learn, thro books and forums etc, the more insecure I feel about investing. Weird...

[Temperament]

Believe it or not?
Extract from John Tracy:-

Q:
Is it worth your time as an individual investor to read carefully through the financial statements and also to compute ratios and make other interpretations?

Ans:-
I doubt it. The conventional wisdom is that by diligent reading of financial statements you will discover under or overvalued securities. But the evidence does not support this premise. Market prices reflect all publicly available information about a business, including the information in its latest quarterly and financial reports.
If you enjoy reading through financial statements, as i do, fine. It's a valuable learning experience. But don't expect to find out something the market doesn't already know. It very unlikely you will find a nugget of information that has been overlooked by everyone else. Forget it ; it's not worth your time as an investor. The same time would be better spent keeping up with current developments reported in the financial press.
Ha! Ha!
How much is truth? And how much is just his opinion?
Anyone like to comment?

[hongonn]

How about using your intuitive? Using the business sense for everyone who has the little businessman in their mind.

Sometimes i find to understand the company business how it operating in what environment is equivalent or even more important than figures. It helps you see beyond book and longer term. Figures are more for health check.

Right? I never touch any business i don't understand. So restrict myself to mom and pop business.

[VIChris]

Hi FFNow, trying to understand your statement "If the company has good cash flow but no earnings, it might be a turnaround situation". Could you elaborate more and appreciate if you could share on why, when one company doesn't has no earnings but has good cash flow, it might be a turnaround?

Thanks for sharing!

Hi VIChris, it's best explained through this site: http://www.investopedia.com/ask/answers/...z2FDCsAq56. With positive free cash flow, the money can be pumped back into its business to bring earnings back to positive by making more quality goods and selling them, etc but that will take some time. A good example is Grand Bank Yacht.

FFNow, thanks for sharing.
Musicwhiz, thanks for further elaborating on it.

[Stocker]

Not suitable to apply PE ratio on property/construction, or turn-around companies.