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Purchase Price Earnings Ratio

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Super Contributor
I would like to discuss if anyone uses this construct for analysis. I know one has a PE ratio, but what about reviewing ones long term holdings using the purchase price of the share as opposed to the current price? This would give the PE of your position based on the price you paid for the shares and the current earnings you're earning? any views on this?
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18 REPLIES 18
Super Contributor
It's the same ratio used in forecasts.....forecasted PE is always lower because the ratio uses current price and future forecasted earnings......just get the rands and cents sorted out in the equation....
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Valued Contributor
I do DY on purchase price, but once I bought I don't worry about the PE
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Super Contributor
I am not asking what the formula is, I am intelligent enough to figure that out, I am asking if anyone uses that when reporting on their long term holdings?
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Super Contributor
I only look at my total dividend to the total value of my portfolio as the end of the financial year. Even this is not a true reflection on the return as the shares are being valued on the last day whereas the dividends have been accumulated through out the year. I don't see the purpose of relating any return to the original cost.
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Super Contributor
ok, that makes sense as well, dividend yield is the cash you get out based on the purchase price... i also look at that, i think we had a discussion about something like this many many years ago on this forum as well.
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Super Contributor
well, my thought is that when one buys a company that isnt listed, one pays something for it and it generates a certain income/earnings. you will monitor your returns based on the price you bought the company for and that company will not be subjected to the varying prices of the stock market (because its not listed), so by trying to look at ones long term portfolio as a business and not as shares, i think this is a good idea. because if you dont plan on selling the current price is actually not that important either for the long term investor. but maybe its nice to know what earnings/dividend you would be getting at the price you paid for it... just my thoughts on running a long term portfolio as a business...
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Super Contributor
I use PE ratios as one of my variables, or factors, in whether I look at a share or not for my investment portfolio. I use a PE ratio as part of a "Neff" Number and "Graham" number value as well. All my little factors then get a "consider" or "hold" class. If more 60% of my factors get the "consider" result, then I will look at that share in more detail - which may or may not lead to a long term buy. This would be for my investment portfolio. Not for trading. PE doesn't figure in my trading model.
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Valued Contributor
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Super Contributor
So you want to compare past price with current earnings? You just going to have a very inflated PE ratio. Don't really see the point in this unless I misunderstood your question? I suppose you can measure the rate of change in the PE to give you an estimate benchmark for future PE ratio...
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Super Contributor
I dont think there is much point in it, but it gives one an indication of how much earnings your invested money is making.
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Super Contributor
Wouldn't it be more beneficial than to draw up your own mini balance sheet for your portfolio and calculate a PE?
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Super Contributor
I have all these ideas to create charts and fancy numbers for each position, remember, they're all long term and some contain many purchases... What I actually like to do is create a chart that shows the earnings and price, but now i want to make a chart that shows purchase value, earnings and dividend since the position was started... but also like you say, i plan on creating a chart that will show the performance of the whole portfolio, the combined earnings, and dividends, and then to see if the earnings are growing as i think they should, over time the idea is to make more money, and for companies thats earnings, not?
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Super Contributor
A factor someone once mentioned to me.....apparently John Neff came up with a ratio to this effect: (Avg Gowth over past ten years + Current Div Yield) / PE....and the resultant score the higher the better...or something like that. I hope I have this right. This is the exact quote I received:

"The Neff number is calculated by adding the dividend percentage, say 4%, to the average growth, say 16% (the growth and the dividend being what you 'buy') - which would be 20, divided by the PE ratio (being the price you pay), say 10, which will give you a Neff number of 2. If you paid less, with a PE of say 5, the Neff number would be 4. Thus the better value a share, the higher the number."
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Super Contributor
I get what you are saying but think it would be kinda redundant to use historic prices on current earnings.. SOL traded at 300 3 years ago, using current earning with that price will get you a ridiculous PE. Having said that I am sure there is a way you can make a model from this. P/E rate of change over period or something similar. Would be nice to see what you end up with though!!
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Super Contributor
The idea is purely to see what earnings you get for your investment, not to decide to buy more or anything. how do business owners monitor their private businesses profitability and performance compared to what they paid for it?
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Super Contributor
Werner,as a businessman, all you can do is value your business on it's latest financials, with a peep at historical earnings to see if it's still on a growth path, maturing or shrinking. Looking back and trying to relate earnings to purchase price doesn't tell you anything as profits a generally pumped back into the business. We (3 partners) bought an insolvent business for an amount of money in November 98, now 15 years later (financial ye2014) it produced 82 times the purchase price in after tax profit, that includes allowing for the 15% dividend tax. Since inception the figure is 575 times purchase price, there is no company on the JSE that has ever even come close, and there must be hundreds of private companies out there that may even make ours look stupid. What is this one business of mine worth, maybe lucky to sell it at 5 or 6 times earnings. That is the difference between public and private,and that is why we're toying with the idea of listing, but it comes at a price..you are no longer your own boss. Bottom line ..... forget what return you get on what you paid but look what return are you getting on what it's presently worth, that's how markets work.
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Super Contributor
yes, that makes sense, i just get the ideas of comparing and seeing what the earnings are that one paid for, maybe completely useless but nice to see how it grows. your business sounds very cool. you should tell me more about it in private? i am always keen to hear such stories!
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Super Contributor
look at my post again...what you bring up here is used commonly in the forecasts...but in a different way to dtermine 'value" based on current price and projected future earnings....Now "to see how it grows. your business" ,actual earnings must approximate the forecast...if it falls short(and Buffet used an average,not just one set of results), then sell it.....
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