Exercise caution when it's PE time

Whether it be through reading the financial press, watching stock news programs, or by taking a formal valuation course, most investors are at least vaguely familiar with the price earnings ratio. In fact, the P/E ratio forms an integral part of the research process for many professional investors; the fact that it is readily available and easily calculable may have something to do with this number being so heavily relied upon. A closer inspection of this ratio reveals a number of unacceptable inadequacies. Investors who are a little more sophisticated in their approach will reason that a stock with a 30x P/E that is growing earnings at 40 per cent per year will be a prudent, justifiable purchase, given that it would trade at an “acceptable” P/E in just two years. However, the analysis would be incomplete without considering the degree of investment required to achieve that earnings growth. (VIEW LINK)