What is P/E Ratio? [and Why it SUCKS!]

Рет қаралды 26,622

Let's Talk Money! with Joseph Hogue, CFA

Күн бұрын

Why is the PE ratio, the most popular investing term for investors, totally worthless? What is the price-earnings-ratio and why do professional investors laugh when they hear it?
I’ve worked as an equity analyst for a decade and can tell you, the biggest lie on Wall Street is the PE ratio. The pundits in the financial media love it but it is a horrible measure for picking stocks. Use it and LOSE money!
In this video, I’ll reveal three reasons why the PE ratio is a bad measure of a stock’s value. I’ll show you how to find the price-to-earnings ratio, if you still want to use it. I’ll also show you three other stock picking techniques that work better.
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I’ll start off defining the PE ratio and showing you how to calculate it. I’ll then reveal what the PE ratio means and show you what is a good PE ratio. Then I’m going to blow your mind by revealing what is tragically wrong with the price-to-earnings measure for stocks and three valuation tools to use instead.
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1:35 What is the PE Ratio?
2:05 How to Calculate PE Ratio
3:00 What does the price-to-earnings ratio mean?
5:05 What is a good PE ratio?
6:30 What is the average PE ratio?
10:40 What is the price-to-sales ratio?
12:10 What is the price-to-book ratio?
13:53 What is the price-to-cash flow ratio?
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Joseph Hogue, CFA spent nearly a decade as an investment analyst for institutional firms and banks. He now helps people understand their financial lives through debt payoff strategies, investing and ways to save more money. He has appeared on Bloomberg and on sites like CNBC and Morningstar. He holds the Chartered Financial Analyst (CFA) designation and is a veteran of the Marine Corps.

Пікірлер: 45

@josephhogue 4 жыл бұрын

Investor must-watch! How the pros pick stocks in this 10-step process 💰 ...kzfaq.info/get/bejne/oKiHn65i19jdlIU.html

@AndyBurdier2009 3 жыл бұрын

like tesla p/e 1,800 rn

@GenExDividendInvestor 4 жыл бұрын

I think it’s like any metric. In isolation it’s not great, but used in context while also using other financial metrics gives it some use. Valuing companies is an art and a science, and PE’s are one helpful ingredient that shouldn’t be overly used.

@catsrule7751 2 жыл бұрын

Valuing companies based on a multiple of their EPS is a common (popular) way to approximate how much a company is worth. I agree with you, in part, it is like any other metric, I think because all metrics in effect give you is a snapshot of a company's picture at a point of time. Metrics don't tell you with assurity what the future will bring to a company - although some other metrics (just data) will try to hint at that. Metrics tell everything about a company at a specific point in time, in the past. I disagree with you, in part, because PE isn't like a Book Value metric, which hints at the question - how much is a company worth if it were to go declare Bankruptcy tommorow? The P/E truly sucks at giving that information. Forward looking though, the ability to and promise to pay the next dividend is worth something; and perhaps if all future dividends could be known from the life of a business up to its final liquidation value - then perhaps the Dividend Discount Model is the best tool for valuing that future income stream in today's dollars, giving it a value above its fair book value, I think.

@PassiveIncomeTom 4 жыл бұрын

*Thanks for going over this as well as the comparison of stocks especially in similar fields.* 👍

@Squintillions 4 жыл бұрын

End screen links work! Missed this one when you released it. Nice refresher on P/E ratios.

@gem_trades4673 2 жыл бұрын

Great video! Mind blowing! I will definitely need to go over this a few times!!

@celsiusfahrenheit1176 2 жыл бұрын

Thanks for the advice. I just finished a semester in Managerial Accounting part of an MBA and learned all about the financial statements which now I realized has helped me more easily understand the financial market.

@charcoaljohnson 4 жыл бұрын

Excellent video, I never knew what these accounting terms meant.

@jaredlove1675 4 жыл бұрын

Bow tie nation,I love it!!!!! Thanks for the great video Joseph

@demohub 4 жыл бұрын

Thank you. Very helpful video.

@InvestingBookSummaries 4 жыл бұрын

I like looking at levered free cash flow myself.

@GregK235 4 жыл бұрын

Thanks for sharing the limitations of PER and suggesting alternatives. Numbers by themselves are so "easy" to use, but without context are usually meaningless (i.e., can be made to "mean" anything). Nice reminder that homework for investing should be both qualitative and quantitative. BTW, which statistics have been defined by recognized organizations. I believe FFO has been defined by NAREIT, but AFFO depends on the company. Are there others?

@josephhogue 4 жыл бұрын

Too right! Saw a comment on Facebook that Peter Lynch says he uses the PE ratio...but what most people don't realize is that analysts 'adjust' the income statement for all the accounting shenanigans used by companies. FFO is a good one for REITs. DCF is used for MLPs.

@kiwieagle64 9 күн бұрын

Thank you.

@cryptoinfinity3097 4 жыл бұрын

man thank you for helping the world.

@Biochem1921 4 жыл бұрын

Amazing video. Thank you very much.

@sgpappu25 4 жыл бұрын

seriously...u explained very well.. but I agree all of these can be fudged... one need to do deep analysis... P/Rev can be wrong is company is selling on Credit.. so every info has to be checked.. It's not so easy as I had thought..

@DSWH072869 4 жыл бұрын

SO True.

@Carlos-kv6hx 4 жыл бұрын

Great video. Could you do a review on the Shiller P/E and CAPE ratios?

@josephhogue 4 жыл бұрын

Great idea. Maybe a little more relevant than the market PE but still prone to the same company-level problems. Will put a video together.

@JayChaimArbiv 4 жыл бұрын

I kinda like the slight dirty language. I can feel your frustration with that indicator :) I just wish you could go over the last example together since it is your favorite and you think it is the most exacting and maybe not go through the math with less accurate. Great episode though - Thanks

@hadestech8147 4 жыл бұрын

Joseph, PE Ratio analysis to a long sewer. I liked that, and it's true sometimes. Thanks

@youtubecommentrater3379 4 ай бұрын

Good on ya bro 💵💵💵🫡

@hanst7218 8 ай бұрын

5:51 I think you only need to know one thing: it's already priced in.

@captnhuffy Жыл бұрын

I would have loved it if the chart at 0:58 scale zoomed in, changed scale to focus on 1960 forward , then 2008 forward.

@RyanCGuitar 4 жыл бұрын

Hi Joseph, excellent video! Would you mind taking a look at my thought process and seeing if I'm on the right track? Target (TGT) Walmart (WMT) P/E 18 25 Past 5 Yrs Aver 14.44 24.43 % Diff Average 26% 1% P/S 0.72 0.66 P/B 4.69 4.9 P/CF 9.15 12.36 I wanted to compare TGT and WMT from a value perspective. I calculated the PEs for TGT and WMT and first compared them since they are industry peers. Looks like using that, TGT looks a little cheaper. But then like your video discussed, does that mean it's actually cheap in of itself? I pulled the 5 yr PE averages, and it looks like TGT is actually about 26% above its historical PE! WMT is more in line with where it has been trading. Now I suppose that P/E could be warranted because it's recent growth has investors willing to pay a premium. Any thoughts on this aspect? P/S looks roughly similar with WMT a bit cheaper. P/B about the same as well. P/CF (nice and clean!) looks to clearly show you make a better move from a CF perspective picking TGT. I think given the P/CF and P/E relative to WMT (even though it is above it's historical average) seem to show TGT the better value play. Seriously appreciate any feedback and subscribed! Look forward to watching more on your channel. When I saw that CFA title on your video, I knew I found the right resource! Thanks!

@josephhogue 4 жыл бұрын

Well thought out. Target struggles more with growth so its valuation multiples are going to be lower. That said, both look a little pricey right now though WMT not terribly expensive.

@michealsizemore1 4 жыл бұрын

Great video. From what website did you get the 'Average PE Ratio for each Sector'. I have been looking but have not been able to find a website that will give that information.

@josephhogue 4 жыл бұрын

It's from the Factset Earnings Insight download

@michealsizemore1 4 жыл бұрын

@@josephhogue Awesome. Thanks.

@garywijaya7653 3 жыл бұрын

How do you find number of shares issued?

@teencred9430 Жыл бұрын

Interesting how each of the three alternatives to the P/E ratio uses one of the three main financial statements.

@jasonparker5746 2 ай бұрын

How about the DCF model? What are your thoughts on it?

@josephhogue 2 ай бұрын

It's useful but as multi-valuation model process. Problem with DCF is that so much depends on the long-term growth estimate. More useful for mature companies

@jasonparker5746 2 ай бұрын

@@josephhogue Thank you sir

@matthewludivico1714 4 жыл бұрын

The conclusion implies an interesting contrarian style of investing...closely watch the higher PE stocks for expected bad news and failing price support levels.

@Fire_soul1796 3 ай бұрын

6:38 what website is this?

@josephhogue 3 ай бұрын

Sectorspdr.com tracker

@Fire_soul1796 3 ай бұрын

@@josephhogue thanks!

@sblijheid 4 жыл бұрын

You never explained what to do or look for with the other ratios. I thought you were going to give a valuation comparison example to show what the P/E missed.

@josephhogue 4 жыл бұрын

Sorry, thought I covered it in the video. Use the other price multiples like P/S and price-to-cash flow measures. These are less easily manipulated. Enterprise Value to Revenue is another good one.