Example Of Essay On Can Investors Trust The P/E Ratio?

The P/E ratio has long been considered a useful tool of evaluating a company’s stock price. Values investors use the P/E as an essential tool in determining the value of an investment. Benjamin Graham popularized the use of PE in his book “Security Analysis.” Derek Simon’s article “Can Investors Trust the P/E Ratio?” explores the relevance of the P/E as an effective determiner of an investment’s worth in the modern era. According to Simon, P/E can be ruled out as an ineffective measure of a property’s worth because of the new thinking that comparing a stock’s earning to its worth is short sighted. In addition, the common practice of exaggerating P/E ratios by investors hinders P/E’s validity. Regardless, P/E is still an important tool in assessing an investment’s worth. Simon advises investors not to write off the P/E pivotal function of measuring the worth of an investment.
The P/E stands for the price to earnings ratio. Investors use the P/E to estimate the current value and condition of a property. The P/E is calculated by dividing the share price and its earnings. A low P/E proposes that a financier needs to pay a low amount for each dollar earned by the company. A high P/E implies that a company would need to pay higher for the company’s earnings. However, critics report that low price to earnings ratios are hardly reported, and this had made the P/E lose the trust of investors as an effective tool of measuring investment’s worth.
In his book, Graham pointed out that P/E 16 is the highest that can be paid in an investment purchase for a common stock. However, Graham pointed out that having slightly high average earnings does not mean that the common stocks have the same value. Based on this approach, Graham was aware that different industries trade at different multiples by using the real or speculated growth prospects. Contrastingly, Graham’s finding did not last particularly long. A change in technology led to the abandonment of the P/E as an instrument of determining investment value for an online .com method. Perhaps the biggest opponent of P/E method was O’Neil who pointed out several problems that accursed from the P/E. O’ Neils finding indicated that many companies overvalued their P/E, which led to the increase of P/E values in the last two decades.
Another skeptic of the P/E is Ben Levisohn. According to Levisohn, the P/E cannot be trusted as a financial asset measurement. Levisohn pointed out that P/E ratio decreases during times of economic uncertainty and increases during favorable economic times. He also points out that rapid- fire online trading system has made P/E irrelevant. This irrelevance is further fuelled by the triumph of computer based trading system. Under the computer based system, macro economic data play an crucial role in determining the value of property that the analysis of individual companies.
Derek Simon view is that P/E presents a correct estimate of an investor’s value if it is observed over a long time. Moreover, with forward thinking, that includes data and overall economic analysis, the P/ E can do just fine. This can be made possible with PEG ratio. Peter Lynch’s PEG ratio is like PEO’s ratio but divided annual EPS growth to standardize the metric.