If the firm has no earning pe is high or when there

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Unformatted text preview: th the firm’s growth perspective. ● If the firm has no earning, P/E is high… or when there is a significant earnings growth. forward P/E ● Alternative P/E => forward ● Apple computer in 2004: ○ ○ ○ ○ ○ ○ Current price is $14.80 Earning last 12 months is $0.05 Trailing (or current) P/E = ? Industry PE is 28 Is company overvalued? The predicted earning for that year was $0.27 per share ○ Therefore forward P/E = 55 P/E applications ● Usually, the analysts use P/E as a valuation tool. ● They compare multiples (ratios) across the company peers. ● See the recent data for apple http://finance.yahoo.com/q/ae?s=aapl P/E Apple and peers AAPL P/E Industry Sector S&P 500 12.50 17.74 14.41 6.32 PEG ratio ● P/E is higher for a company with a higher growth rate. ● Thus using just the P/E ratio would make highgrowth companies appear overvalued relative to others. ● It is assumed that by dividing the P/E ratio by the earnings growth rate, the resulting ratio is better for comparing companies with different growth rates PEG ratio (2) PEG = (P/E) / (5 yr future earnings growth rate)...
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