P/e ratio

[Ceejay]

Hello! I'm a newbie in investing, 0 experience. just want to clarify my doubts. 
If I were to analyse a company, looking at the P/E ratio, its generally that p/e now vs the future is generally higher. And some are higher in terms of their industry and nature. Not following the textbook guidelines, how do we actually determine if the p/e is Low and their is value to it? 

Hope someone can shed some light on me with this value approach

[soros]

This report on cape value may help . Cape = Cyclically adjusted price to earnings ratio

Cape for Singapore = 13 , for HK = 17 , for JP = 26 and USA = 28.

http://www.telegraph.co.uk/investing/sha...kets-2017/

[grubb]

http://intrinsicinvesting.com/2016/09/01...pe-ratios/

low PE does not necessarily mean cheap. What matters is ROIC

[TTTI]

http://intrinsicinvesting.com/2016/09/01...pe-ratios/

low PE does not necessarily mean cheap. What matters is ROIC

sure, low PE does not mean it's cheap.
To begin with, the definition of cheap by itself, is variable.

But, PE is an assessment of the price that you're paying for the earnings of the company, as a multiple.
ROIC is an assessment of the return on the amount of capital that the management has deployed.

So they are not mutually exclusive, and in fact, they are parameters looking at different things altogether.

We could make a comparison between the traditional PE ratios, cyclical PE or Shiller's PE,  the price vs forecasted earnings, or Enterprise value etc.
These are all somewhat variants, as essentially, they are trying to judge the price vs the earnings, at its core. They are all trying to relate price to earnings of the company, with some adjusting for debt, for volatility, for growth, for cycles etc.

ROIC on the other hand, you'd notice, has no "price" component. It's a separate matter altogether.

All can be used in conjunction to paint a picture of the company's financial health.

[weijian]

sure, low PE does not mean it's cheap.
To begin with, the definition of cheap by itself, is variable.

But, PE is an assessment of the price that you're paying for the earnings of the company, as a multiple.
ROIC is an assessment of the return on the amount of capital that the management has deployed.

So they are not mutually exclusive, and in fact, they are parameters looking at different things altogether.

We could make a comparison between the traditional PE ratios, cyclical PE or Shiller's PE,  the price vs forecasted earnings, or Enterprise value etc.
These are all somewhat variants, as essentially, they are trying to judge the price vs the earnings, at its core. They are all trying to relate price to earnings of the company, with some adjusting for debt, for volatility, for growth, for cycles etc.

ROIC on the other hand, you'd notice, has no "price" component. It's a separate matter altogether.

All can be used in conjunction to paint a picture of the company's financial health.

Charlie Munger's quote couldn't be more apt - "To the man with a hammer, everything looks like a nail"....Although i have to admit that i took a long time to fully comprehend what it really meant.

[ksir]

sure, low PE does not mean it's cheap.
To begin with, the definition of cheap by itself, is variable.

But, PE is an assessment of the price that you're paying for the earnings of the company, as a multiple.
ROIC is an assessment of the return on the amount of capital that the management has deployed.

So they are not mutually exclusive, and in fact, they are parameters looking at different things altogether.

We could make a comparison between the traditional PE ratios, cyclical PE or Shiller's PE,  the price vs forecasted earnings, or Enterprise value etc.
These are all somewhat variants, as essentially, they are trying to judge the price vs the earnings, at its core. They are all trying to relate price to earnings of the company, with some adjusting for debt, for volatility, for growth, for cycles etc.

ROIC on the other hand, you'd notice, has no "price" component. It's a separate matter altogether.

All can be used in conjunction to paint a picture of the company's financial health.

Charlie Munger's quote couldn't be more apt - "To the man with a hammer, everything looks like a nail"....Although i have to admit that i took a long time to fully comprehend what it really meant.

Precisely.
But how many tools do anyone have up his sleeves? How many is enough? The limit is as much as human greed. Hence to cap it all, the circle of competence.

[weijian]

sure, low PE does not mean it's cheap.
To begin with, the definition of cheap by itself, is variable.

But, PE is an assessment of the price that you're paying for the earnings of the company, as a multiple.
ROIC is an assessment of the return on the amount of capital that the management has deployed.

So they are not mutually exclusive, and in fact, they are parameters looking at different things altogether.

We could make a comparison between the traditional PE ratios, cyclical PE or Shiller's PE,  the price vs forecasted earnings, or Enterprise value etc.
These are all somewhat variants, as essentially, they are trying to judge the price vs the earnings, at its core. They are all trying to relate price to earnings of the company, with some adjusting for debt, for volatility, for growth, for cycles etc.

ROIC on the other hand, you'd notice, has no "price" component. It's a separate matter altogether.

All can be used in conjunction to paint a picture of the company's financial health.

Charlie Munger's quote couldn't be more apt - "To the man with a hammer, everything looks like a nail"....Although i have to admit that i took a long time to fully comprehend what it really meant.

Precisely.
But how many tools do anyone have up his sleeves? How many is enough? The limit is as much as human greed. Hence to cap it all, the circle of competence.

quotes don't come in isolation of course. Then the next favorite quota appears - "The tight rope walker that has survived for the last 25 years is there because he/she knows some things about survival, ie. the boundaries of where he/she should or shouldn't venture into".

As OPMIs, it is lucky we can do trial and error to probe the limits of our boundaries, in an attempt to widen them bit by bit - the cycle of trial, error, feedback and re-try. Just that for long only investors, it might take a long long time and so that's where position sizing comes in as well. We just need to be brutally honest with ourselves (they term it as "intellectual honesty") to know the difference between luck and skill.

[grubb]

Thanks for sharing, and I agree there are multiple ways to value a company other than PE. But that still does not answer Ceejay's question of why some industries have a higher PE compared to others. You are saying 'look, its not just about PE. you should value banks with PB, value REITs with dividend yield, value tech stocks with PEG'. but it doesnt explain why Public Bank is trading at >2x PB and DBS is trading at 1.1x PB.

so take away the industry, and imagine 2 companies with identical size, balance sheets and business models, and therefore making the same amount of money. They have identical prospects, and the market is fully saturated, and there will be zero revenue growth. Both companies will therefore trade at the same price and valuation.

The second company discovers a proprietary way to increase their ROIC by reducing the capex needed such that their FCF doubles. You can quickly see that the higher ROIC company will trade at a higher valuation. And you will see that the industry type and growth prospects have nothing to do with the higher valuation. And I use valuation here, not a specific metric like PE, PB etc.

If valuation metrics is like the meat in the stew that adds flavour to it, ROIC is the water that holds it all together.

Since we are talking about quotes here, I will add a favourite quote of mine from Charlie Munger too - "Well, you'll end up agreeing with me because you're smart and I'm right."

[specuvestor]

so take away the industry, and imagine 2 companies with identical size, balance sheets and business models, and therefore making the same amount of money. They have identical prospects, and the market is fully saturated, and there will be zero revenue growth. Both companies will therefore trade at the same price and valuation.

The second company discovers a proprietary way to increase their ROIC by reducing the capex needed such that their FCF doubles. You can quickly see that the higher ROIC company will trade at a higher valuation. And you will see that the industry type and growth prospects have nothing to do with the higher valuation. And I use valuation here, not a specific metric like PE, PB etc.

If valuation metrics is like the meat in the stew that adds flavour to it, ROIC is the water that holds it all together.

Adding to the thought experiment. Imagine if one company removes 1/2 the equity and replace with debt. Will they trade at same price? We see it in real life during IPO or capital reduction. Does financial engineering add value?

Agree that ROIC is the key indicator, issue is how the R (cashflow or P/L) and IC (equity or capital) is calculated

[chialc88]

Not many people shared their view point based on Singapore context.

Ms Teh had done a lot of back testing and it's worth reading (repeatedly every few months/years).
link (thanks to Musicwhiz)

Low PE stocks had one added advantage 
-> high dividend yield.

And her excellent caveat related to S-chip.

Other than her articles, you can also watch Eric too: