Well, it does have flaws, first its affected by capital structure, second Net income is calculated after non-Operating gains and losses. Thus a non-operating loss such as non cash write off can significantly lower earnings, causing the P/E to be artificially high. To analyze valuation multiples across industries, you need a multiple independent of capital structure. The PE ratio doesn’t meet this criteria. Better to use EV multiples
As a stand alone measure, I wouldn’t see it affected by capital structure as earnings are not directly a consequence of the capital structure, but yes, capital structure can be a consequence of earnings.
You would have to consider a trend on earnings over multiple periods to link it to the capital structure.
As per, it would take some sense on his derivative over time.
But still, even as multiple stand alone measures, citing the PE seems to me senseless, as you gave an example, without some additional data.
I am scared to see this happen all the time in reports and other data analysis papers.
Big misrepresentation
It really seems a “Vetrina” ratio, that if used on a recommendation has to bear additional data sustaining it.
EV multiples are a larger measure, and surely taking in account the all assets.
We should always use EV multiples to understand the effectiveness of a company on managing its assets. There if you want to let aside debt issues and trust the managers , overlooking just capital issues is fine. But you’ll have your veil of ignorance on the real value used to run the business.
Thanks again sauraBh, rolling around things gets them more familiar,
