Friday, May 23, 2008

*** New Video: V2C. The P/E to Growth Ratio

One of the shortcomings of the P/E ration is that it does not reflect the fact that some companies have higher P/Es than others (in particular in the year that might be being looked at) than another, but might also have higher earnings growth. With higher earnings growth, a company with a high P/E on next year's earnings might have a much lower P/E on a future year's earnings given that the 'E' would have grown to be much higher then.

In order to incorporate, normalize and adjust for differences in earnings growth, the P/E to growth ratio is often used.

It adds information and is another commonly used ratio - it does not address all of the shortcomings of using P/Es.

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