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What does Price earnings multiple mean?


yadayada
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Not a question, but a piece on it by credit suisse. Thought it was an interesting read.

 

http://ify.valuewalk.com/wp-content/uploads/2014/02/document-805915460.pdf

 

some thoughts on it? For example they say, when earnings decline 10% in perpetuity with a 10% cost of capital, it deserves a 4.5 multiple. But something like that seems a bit too simple. Because alot of businesses still have a place, so they stabilize at some point. How do you factor that in?

 

For a 5% that formula would dictacte a 6.3x multiple.

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Guest deepValue

some thoughts on it? For example they say, when earnings decline 10% in perpetuity with a 10% cost of capital, it deserves a 4.5 multiple. But something like that seems a bit too simple. Because alot of businesses still have a place, so they stabilize at some point. How do you factor that in?

 

It's a hypothetical; you don't factor it in.

 

The value of any asset is the present value of its future cash distributions. Look up 'discounted cash flow valuation.' Do the math and divide by current earnings to get the P/E ratio you should pay for the return you want to get. The P/E ratio is just a quick and easy way to capitalize current earnings; e.g., pay 15x normal earnings if you want 6.66% annual return. It's a ballpark measure at best.

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