Hi all
As the subject line says, there is an answer within the CFA curriculum book. Which says the company with NMF P/E ratio is undervalued compared to the benchmark value( trailing benchmark P/E : 15.03, Ex.10 Chap Market Based Valuation). The P/E used is trailing P/E if that is something making a difference and I am not clearly interpreting it. The other part is I believe NMF is a situation wherein either the Earnings is negative or close to zero. In the negative case, the comparison with benchmark P/E does not make sense. While if NMF is due to the fact Earnings is close to zero that essentially means the P/E ratio is INFINITY I would assume, numerically ? In that sense definitely it’s not undervalued.
Hi, I agree. Given a NMF on its own I don’t think you can generalise if it is cheap or expensive. There are too many reasons why it could be NMF.
With this example if we move on to example 11 it tells us that the cos. earnings were negative (for me that would it is more expensive than those with earnings - we have to careful with ranking and negative numbers as a higher negative number is bettter, ie P/E = -10 is better than P/E = 3).
In example 11 we get a low fwd PE for Century LInk making it undervalued on a fwd P/E basis. I think the author has written the whole example togther and when writing example 10 has taken into account we have a limited set of infaormation at that point,
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True, further analysis as done in Ex.11 does signify the stock with NMF being actually a better selection. It’s just the question specifically mentioned using just trailing P/E as benchmark if you had to check if a stock is undervalued or not is what confuses me a bit. But anyways, I believe the author might have written the whole example together as you pointed out.