The Essential P/E
Understanding the stockmarket through the price-earnings ratio
This book is available for download with iBooks on your Mac or iOS device, and with iTunes on your computer. Books can be read with iBooks on your Mac or iOS device.
The price-earnings ratio, or P/E, is the most commonly quoted investment statistic, but have you ever considered what it actually means? For most people it's a shorthand way of deciding how highly the market regards a company, with investors prepared to overpay for earnings from a high-P/E 'glamour' stock as opposed to a low-P/E 'value' stock. However, academics have known since 1960 that the opposite is true: value stocks outperform glamour stocks consistently over decades.
A company with a low P/E may have been marked down for no readily apparent reason and thus an attractive value investment for those with the patience to wait while the market re-values it. However, the P/E is a backward-looking measure and just because the company earned £1 per share last year it doesn't necessarily mean it will earn anything like that in the foreseeable future. Or, a low P/E can mean a company is deservedly cheap because it is in ﬁnancial difficulty - in this case the P/E is likely to become cheaper yet or the company even go into administration.
This book is a practical guide to how you can adjust and improve the price-earnings ratio and use it, alongside other ﬁnancial ratios, to run against the crowd and boost your stock returns.