P/E ratio and PBV ratio are the two widley used measures of market performance of the securities. what does the following four categories of securites imply?
1. securities with High P/E Ratio and and High PBV Ratio
2. securities with Low P/E ratio and Low PBV Ratio
3. securities with High P/E ratio and low PBV ratio
4. securiteis with low P/E ratio and high PBV ratio
and also
what factors can influence the four different combinaions of P/E ratio and PBV ratio ?
thanks in advance
Dear Srikanth
There are a myriad of answers to the 4 categories. I will posit a few rationales. The first 2 pairings, High P/E & P/BV as well as Low P/E & Low P/BV, would be attributed to a company performing poorly with bleak earnings growth prospects that contribute to a low stock price per share. The 3rd pairing of High P/E & Low P/BV could be for a firm that has high future earnings growth with excessive balance sheet assets that have little market value such as goodwill derived from acquisitions that went sour. The 4th pairing of Low P/E & High P/BV may be explained by organizations with dismal earnings growth expectations coupled with low asset book values relative to a high stock market price due to highly valued intellectual property such as patents, trademarks, and copyrights.
Dear Srikanth,
in addition to the previous answers, note the link between PB and PE, which is ROE:
PB = P/B x Earn/P x P/Earn = Earn/B x PE = ROE x PE
Thus, ROE is central for comparing/linking PB and PE.
I completely agree with the answers of Vladimir, Raymond and Andreas
The P/E and P/BV are multiples reflecting the Performace of the company and its stock. Given the numerator is the price of the stock, so the answer should be linked to stock valuation and its related factors including the required return on the stock, the company risk profile, the industry premium, Market inflation, company's expected free cash flow,.. etc.
Then we should compare the stock price with the BV as well as the volatility of stock price over a specific period. If the price is below in the BV, there is a deterioration in the companies performance and hence investor would require more return as a compensation for the said risk, if the there is a volatility of stock price compared to BV, there is a risk however, the risk would be acceptable in case the stock price movement reflects periodic growth during the period under study.
Finally, Both multiples should be compared with industry peers to stand on the stock performance and risk.
Raymond is on point. I think the solution already provided by the commentators will suffice.
Largely agreed but would also highlight the added insight that can be gained by reviewing as a time series - i.e. looking at changes in the ratios rather than simply looking at a single (e.g. current) data set.
Right from my first sighting of this question, I avoided directing my comments to because the part of the equation on right side is incomplete. But let us assume that it is P/BV meaning profit to book value of the assets = net book value or the likes. Now, the question can be re-stated as profit to earnings ratio and profit to net book value ratio. It is mostly likely yield market value or ...................
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