PE ratios are misleading for cyclical businesses?It's a bad idea to buy at low PE

[wahkao]

PE ratios are misleading for cyclical businesses?It's a bad idea to buy at low PE

P/E ratio can be misleading a lot of times, especially when the underlying business is cyclical and unpredictable. Cyclical businesses have higher profit margins at the peaks of the business cycles. Their earnings are high and P/E ratios are artificially low. It is usually a bad idea to buy a cyclical business when the P/E is low.


Got this statement from GF's website. Anyone can shed some light on this statement?

[Greenrookie]

PE ratios are misleading for cyclical businesses?It's a bad idea to buy at low PE

P/E ratio can be misleading a lot of times, especially when the underlying business is cyclical and unpredictable. Cyclical businesses have higher profit margins at the peaks of the business cycles. Their earnings are high and P/E ratios are artificially low. It is usually a bad idea to buy a cyclical business when the P/E is low.


Got this statement from GF's website. Anyone can shed some light on this statement?

If I am not wrong, the concept originated from peterlynch' "one up on Wall Street" book.

It is true. If u are buying CPO plantation company as a recovery play, u will see as another forummer has said, it's PE is 300 if u annualized latest quarter of results.

The problem is, we never know how long a peak or a trough will lasts, or if it is going to breaker higher high before bubble pricks.

That is where qualitative anaylsis come in and you decide looking forward to the next 3 years at least what is the reasonable earnings. (Concept by fisher)