PE and EY

[KVW]

If a share has a low PE and a high EY this is a good combination. Market PE at 10 and this share at 2.5 EY market at 10 and this share at 40. Would you buy this if this was your only info?

[bangbul]

Nope, low PE tells me the market is pricing in a weaker performance. EY is just %= PE

[SimonPB]

EY is just inverse of PE as % .. so look at either or ..

[louisg]

No. PE's are historical.

[SimonPB]

everything is historical ..

[louisg]

I'm implying that one should rather focus on the future rather than the past. Surely future earnings should be the focus for the investor?

[divz]

Then you need a crystal ball surely you need history as a base to determine the future so imo they work hand in hand. PE is an indication of how the co is performing in relation to similiar co's so you have to use it as a tool.

[SimonPB]

sure, and the draw back with future earnings is that we ahve to make assumptions and doing that a year ago one was completely wrong .. the flip side is that past earnings are a guide but only that .. point is I spose is that both have limitations, as long as we understand them ..

[kwagga]

If this is your only info then you have serious problem.

[#10]

I use historical PE values as a benchmark range for what risk the markets have been prepared to take in the past on my stock. Personally, I never invest until I have done my own discounted cash flow projection. That way, I know what news to look out for telling my that my investment is in trouble. For e.g., I am pretty peeved with Merafe right now, and am selling out, because my DCF projection tells me even if they surpass 2008 topline earnings (need to grow by more than 100% to do this), they are still going to perform worse than 2008 bottom line.

[olilau]

yes, and the problem with crystal balls are that its often more about balls than crystal...

[louisg]

absolutely

[louisg]

PE ratio is a great tool, however it cannot be used in isolation. A 25 PE can be considered cheap OR expensive depending on circumstances. A 15 PE may be expensive for banks (on a historical basis)yet reasonable for food retailers, etc etc... When banks start to write back their provisions, we may well see the banks temporary sitting on PE's of 20-25. But as soon as the results filter in the PE's will probably settle to more "normal" ratings of 10-12.