Posted by UnicornP > 2018-09-12 10:24 | Report Abuse

Pro trading: Buy before price starts rallying.
Noob trading: Wanna buy when price already rallied. So use P/E to justify stock is overvalued to console himself.

Posted by qqq3 > 2018-09-12 10:28 | Report Abuse

very good writing....insightful

Posted by qqq3 > 2018-09-12 10:30 | Report Abuse

I been here 2 years now. People talk too much about PE, not enough about its pitfalls and business sense, ROC etc etc.

Posted by Up_down > 2018-09-12 12:09 | Report Abuse

Nothing wrong for using PER as a basic benchmark for comparison purposes. This ratio is easily understood by investors. It’s very useful when we want to do priminary screening before get into the details to study further. There are many conditions affecting the share price movement besides PER. Low PER is normally more attractive to investors since it offers certain degree of reliable earnings at the present moment. But business operation may get better of worse tomorrow.

Posted by 3iii > 2018-09-12 18:21 | Report Abuse

What is 'low' PE ratio?

"You should look for stocks with a low PE ratio." What is 'low'?

Depending on your point of view, low PE ratios could mean:

- PE of 5 or below
- PE of 15 or below
- anything less than the median PE of the S&P 500 industrials
- PE in the bottom 20% of the market
- PE that is less than the annual EPS growth rate of the company (PE/EPSGR ratio less than 1)

All the above precise definitions of 'low' PE have been used by various investors.

Posted by 3iii > 2018-09-12 18:25 | Report Abuse

Don't use the PE ratio

The price to earnings ratio (PE) s the most commonly used valuation yardstick by investors.

It is very easy to calculate.

PE ratio = share price / earnings per share (EPS)


In simple terms, shares with high PE ratios are seen as being expensive whilst those with low ones are seen as being cheaper.

Despite its simplicity, PE ratio has many pitfalls that can give investors a misleading view of how cheap or expensive some share really are.

The PE ratio's drawbacks are all to do with the "E" or EPS, part of the calculation


1. EPS is easy to manipulate.

Companies can boost EPS by changing accounting policies.

For example, they can extend the useful lives of fixed assets such as plant and machinery, which lowers the depreciation expense and boosts profits.

2. EPS says nothing about the quality of profits.

It doesn't take into account whether profits have changed due to sales of existing products or services - the best source of profits growth - or whether the company has invested heavily in new assets or bought another company (acquisition).

Share buybacks boost EPS by shrinking the number of shares outstanding, even if profits are static or shrinking. Buyback can be done when the shares are expensive. By paying too much, a large chunk of shareholder value is destroyed; the cash spent is wasted.

3. EPS may not resemble true cash profits.

Quite often a company's true cash profits are significantly more or less than its EPS (more often less).

4. EPS may be based on profits that are unsustainably high or temporarily low.

This means that the PE ratio could be misleadingly low or high.

This is a particular problem for cyclical companies.



Summary:

For the above reasons, EPS can be unreliable and you should not rely on PE alone.

Once again, PE has may pitfalls that can give investors a misleading view of how cheap or expensive some shares really are.

Posted by qqq3 > 2018-09-12 18:49 |

Post removed.Why?

Posted by qqq3 > 2018-09-12 18:51 | Report Abuse

what is wrong with this forum....why people in forum lost money....neatly described....


osted by UnicornP > Sep 12, 2018 10:24 AM | Report Abuse

Pro trading: Buy before price starts rallying.
Noob trading: Wanna buy when price already rallied. So use P/E to justify stock is overvalued to console himself.

Posted by probability > 2018-09-12 19:09 | Report Abuse

V, value is a function of variables (x, y, z, m, n and etc)

and y could be a function of variables (a, b, c, d)

if x has the greatest magnitude of implications to V (highest sensitivity), i rather focus my energy predicting x....

X is basically the Earnings (E).
..............................

i dont want to study pages and pages of information for figuring out variables y, z, m, n....though they have implications to V but its insignificant (less sensitive).

Worst are those who even extend their studies to figure out variables a,b,c,d .... and talk like professors.

even worst are those only talks about these variables blindly without being able to address each variables sensitivity to V = value.

Hope the above tells why P/E matters. The price you pay for the value you get.

Thank you

Posted by Up_down > 2018-09-12 19:14 | Report Abuse

You have been following WB for long time. You have never got enough real experienced in buying stocks with low PER. To apply PER in trading or investing, you need to do a lot of homework for comparison of companies within industry, peers, market as a whole and etc. sometimes, we use adjusted PER to exclude exceptional item or uncommon item, reliability of management, working out potential future earnings by considering conditions of the market or industry.....Not so straightforward as you think ‘ low PER ‘ alone for buying shares. It is about relativity whether expensive or cheap in making a comparison with others at a point of time. It’s hard for you to have a full grasp in exploiting PER approach besides theoretically.

Posted by 3iii > Sep 12, 2018 06:25 PM | Report Abuse

Don't use the PE ratio

The price to earnings ratio (PE) s the most commonly used valuation yardstick by investors.

It is very easy to calculate.

PE ratio = share price / earnings per share (EPS)


In simple terms, shares with high PE ratios are seen as being expensive whilst those with low ones are seen as being cheaper.

Despite its simplicity, PE ratio has many pitfalls that can give investors a misleading view of how cheap or expensive some share really are.

The PE ratio's drawbacks are all to do with the "E" or EPS, part of the calculation


1. EPS is easy to manipulate.

Companies can boost EPS by changing accounting policies.

For example, they can extend the useful lives of fixed assets such as plant and machinery, which lowers the depreciation expense and boosts profits.

2. EPS says nothing about the quality of profits.

It doesn't take into account whether profits have changed due to sales of existing products or services - the best source of profits growth - or whether the company has invested heavily in new assets or bought another company (acquisition).

Share buybacks boost EPS by shrinking the number of shares outstanding, even if profits are static or shrinking. Buyback can be done when the shares are expensive. By paying too much, a large chunk of shareholder value is destroyed; the cash spent is wasted.

3. EPS may not resemble true cash profits.

Quite often a company's true cash profits are significantly more or less than its EPS (more often less).

4. EPS may be based on profits that are unsustainably high or temporarily low.

This means that the PE ratio could be misleadingly low or high.

This is a particular problem for cyclical companies.



Summary:

For the above reasons, EPS can be unreliable and you should not rely on PE alone.

Once again, PE has may pitfalls that can give investors a misleading view of how cheap or expensive some shares really are.

Posted by probability > 2018-09-12 19:22 | Report Abuse

when we talk about P/E ...we should not talk about the observed E...we should talk about the E generation potential (x).....

I rather spend all my energy for this single variable x...then talking about other observed variables (y,z,m,n,a,b,c,d) like Debt level, cash flow, ROE or ROIC, management personality, etc...

Posted by Up_down > 2018-09-12 19:32 | Report Abuse

Future E earnings is important to determine the price of shares now. Without current earnings actual figures, it’s rather difficult to project (not extrapolate) the earnings base on the conditions or trend in next 6 months. We have to consider conditions to monitor the risks in projecting future earnings ie Commodity price trend (raw materials), government regulations, Forex rate, turnover trend, interest rate (gearing), contracts, taxation.....many variables.

Posted by Up_down > 2018-09-12 19:43 | Report Abuse

‘ low PER’ doesn’t mean a good buy. ‘ high PER ‘ doesn’t mean not a good buy. It all depends on potential future earnings and the prospect of the whole industry or regional market. If we apply PER rigidly, we may expose to higher risks. Where got so simple to apply PER approach to make money through trading. Lolz

Posted by 3iii > 2018-09-12 19:48 | Report Abuse

<<<Posted by Up_down > Sep 12, 2018 07:43 PM | Report Abuse

‘ low PER’ doesn’t mean a good buy. ‘ high PER ‘ doesn’t mean not a good buy. It all depends on potential future earnings and the prospect of the whole industry or regional market. If we apply PER rigidly, we may expose to higher risks. Where got so simple to apply PER approach to make money through trading. Lolz
>>>>


Why was Hengyuan trading at low PE last year just before otb "promoted" it?

What is Hengyuan's PE today?

Posted by probability > 2018-09-12 19:50 | Report Abuse

yup....the current earnings provides one of the greatest certainty about the future earnings provided one is well aware why is the current earnings are as such.

Its like when you are driving on a road you still need to consider the present traffic level in front of you to estimate your arrival time...though there is no way u can predict with certainty how the traffic level would be just after another 200 meter ahead..

Posted by Up_down > Sep 12, 2018 07:32 PM | Report Abuse

Future E earnings is important to determine the price of shares now. Without current earnings actual figures, it’s rather difficult to project (not extrapolate) the earnings base on the conditions or trend in next 6 months. We have to consider conditions to monitor the risks in projecting future earnings ie Commodity price trend (raw materials), government regulations, Forex rate, turnover trend, interest rate (gearing), contracts, taxation.....many variables.

Posted by 3iii > 2018-09-12 19:50 | Report Abuse

PE should not be used in isolation.

Posted by probability > 2018-09-12 19:52 | Report Abuse

Inclusion of others should not undermine or cloud the value of PE..

Posted by 3iii > Sep 12, 2018 07:50 PM | Report Abuse

PE should not be used in isolation.

Posted by Up_down > 2018-09-12 19:53 | Report Abuse

HY is still trading at low PER today but it can’t fool the market without any factual to support earnings in the next 6 months. How’s the crack spread now and projected EPS in next 2 quarters? Investors or traders are not fool nowadays.

<<<Posted by Up_down > Sep 12, 2018 07:43 PM | Report Abuse

‘ low PER’ doesn’t mean a good buy. ‘ high PER ‘ doesn’t mean not a good buy. It all depends on potential future earnings and the prospect of the whole industry or regional market. If we apply PER rigidly, we may expose to higher risks. Where got so simple to apply PER approach to make money through trading. Lolz
>>>>


Why was Hengyuan trading at low PE last year just before otb "promoted" it?

What is Hengyuan's PE today?

Posted by probability > 2018-09-12 19:55 | Report Abuse

ha ha ha..

Posted by Up_down > Sep 12, 2018 07:53 PM | Report Abuse

HY is still trading at low PER today but it can’t fool the market without any factual to support earnings in the next 6 months. How’s the crack spread now and projected EPS in next 2 quarters? Investors or traders are not fool nowadays.

Posted by Up_down > 2018-09-12 20:02 | Report Abuse

Exactly. We still have to drive to the destination even though uncertainty is ahead of us. It depends how we monitor the risks over the journey. We can stop temporarily to take a mindful breath of fresh air during the way. We can stop and overnight in the hotel if the risks higher (very tired). .....

Posted by probability > Sep 12, 2018 07:50 PM | Report Abuse

yup....the current earnings provides one of the greatest certainty about the future earnings provided one is well aware why is the current earnings are as such.

Its like when you are driving on a road you still need to consider the present traffic level in front of you to estimate your arrival time...though there is no way u can predict with certainty how the traffic level would be just after another 200 meter ahead..

Posted by Ricky Yeo > 2018-09-12 20:06 | Report Abuse

The points being written are gladly ignored in most of the comments here. To point out a few:

1. Prediction of highly unknowable forex, interest rate.
2. Calling ROC insensitive or insignificant
3. Projecting EPS for next 2 quarters (trend in 6 months)

Posted by probability > 2018-09-12 20:21 | Report Abuse

the problem with historical variables (like ROC and growth G) is that its often well accounted by the price P causing the discount or mis-pricing to its intrinsic value way smaller than....the massive discount one would capitalize if the coming 6 months earnings projection are correct & sustainable, with current price (as reflected by P/E).

Posted by Up_down > 2018-09-12 20:59 | Report Abuse

Management integrity is the primary priority for studying future earnings. If a company management team is not reliable then we may have to call it a day.....unless we want to punt a share based on management intention (ulterior motive) to goreng it.


Posted by probability > Sep 12, 2018 07:22 PM | Report Abuse

when we talk about P/E ...we should not talk about the observed E...we should talk about the E generation potential (x).....

I rather spend all my energy for this single variable x...then talking about other observed variables (y,z,m,n,a,b,c,d) like Debt level, cash flow, ROE or ROIC, management personality, etc...

Posted by Up_down > 2018-09-12 23:14 | Report Abuse

It depends on the industry and the growth of the company. sometimes, we use debtor turnover ratio and inventory turnover ratio to understand the operation risks. Cross checking between turnover, debtor, inventory and borrowing to identify abnormalities and finding out reasons behind. it's part of the risk assessment.


========
probability Inclusion of others should not undermine or cloud the value of PE..

Posted by 3iii > Sep 12, 2018 07:50 PM | Report Abuse

PE should not be used in isolation.
12/09/2018 19:52