How important is the PE ratio

[Ruby]

Hi everyone. I'm trading/investing medium to longer term. Recently most retail shares has been performing very well. I would like to put some money in retail shares but most of their PE ratios are quite high. It seems that Woolies has the lowest of the bunch. How important is the PE ratio. I normally do my own technical analysis to decide a good spot to enter but one can not completely ignore the fundementals.

[#2]

Most fund managers place alot of emphasis on PE ratios and you often hear them speaking of the overall PE ratio of the JSE ALSI relative to markets abroad and the commenting on it by saying that our market is either cheaper or more expensive than overseas markets. They use it as a guide to determine value. Really high PE ratios are almost just as bad as really low PE rations although low PE ratios do indicate more potential upside in the event of the company fundamentals being okay i.e. not all low PE ratio companies have serious issues depressing their share prices. It's good that you're using technical analysis for entry points. Depending upon the indicators used, you should be able to gauge whether or not certain Retailers have been overbought or oversold.

[#3]

From what I understand the general rule is anything below 12 is cheap, above 18 is expensive?

[Ruby]

Thanx, yes I uderstand the priciple behind them. I was just wondering if they will remain high, since the retail sector normally expect higher returns over Dec season, and the results will "catch up" with them in the beginnig of the year.....and then there is MRF having a nice little run with a PE of 39. :)

[Blik]

I think its important to look at the PE range of the share that you want to buy and not look at a set PE limit alone. I have downloaded the complete PE range history available for shares like SPP and SHP. With a bit of formatting you can graph the PE range. So with SPP for example, it listed at a PE of just above 12, and has only dipped below the 12 mark once since, while it has been as high as 23 or 24. It has only dipped below a PE of 14 couple of times, so for me getting SPP at a PE of below 14 would be great - if I was using PE alone as a value indicator. Basically the choice is yours as to when you think a share is a buy or not. I use PE along with a number of other ratios to value a share. IMHO.

[Ruby]

Thanx Blik. Good idea. Will look into it. Same here, PE is not the only indicator. Since my time frame is a bit longer I can wait for the right oppertunity. I do have some money in SHP for a while now so at least got one foot in the door already. Just scouting for one or two more.

[G_V_V]

It's all relative to the PE of interest rates, the cost of money.

[louisg]

As a long term investor, I rely on 3 things to increase my wealth. Firstly, an increase in earnings. Secondly, an increase in dividends and thirdly an upward re-rating of the share. An upward re-rating is not essential, but if one buys at historically high PE levels, one should expect the re-rating to move down towards more "normal levels". Short term volatility should be ignored or used as opportunities to buy quality at fair or better prices.

[Spoegs]

My opinion is the PE is a good start, others to look at are the PEG ratio which takes growth into account. My opinion is that earnings (the E in the PE) is a bit of a lottery since by the time E is calculated the accontants have been torturing the numbers. Price to Cash Flow is a nice one too. The accountants have more trouble manipulating Cash Flow and cash is king apparently. Apparently 0<20 can be regarded as healthy.

[Starsky]

what about q ? regarded as better indicator of value. Tobin's q Another measure of performance, Tobin's q, is the ratio of the market value of a firm's assets (as measured by the market value of its outstanding stock and debt) to the replacement cost of the firm's assets (Tobin 1969). This measure of performance is not used as often as either rates of return or price-cost margins. If a firm is worth more than its value based on what it would cost to rebuild it, then excess profits are being earned. These profits are above and beyond the level that is necessary to keep the firm in the industry. The advantage of using Tobin's q is that the difficult problem of estimating either rates of return or marginal costs is avoided. On the other hand, for q to be meaningful, one needs accurate measures of both the market value and replacement cost of a firm's assets.

[Rams]

If you looking for value then ROE(return on equity) is important as it brings together all elements of the company financials.PE can be used for entry.