PE RATIO EXPLAINED - HOW TO USE PRICE EARNINGS RATIO FOR STOCK MARKET DECISIONS | Summary and Q&A

TL;DR

Price Earnings Ratio (P/E ratio) is crucial for investment decisions, focusing on real earnings over reported earnings.

Key Insights

• 🥳 The P/E ratio is a critical metric for investors, but it is essential to focus on real earnings over reported earnings to make sound investment decisions.
• 🥺 Companies often adjust their earnings to exclude non-recurring events, leading to inflated reported earnings and misleading investors.
• 🍉 Benjamin Graham's approach of using average earnings over the long term provides a more accurate assessment of a company's financial performance.
• 🎵 Dilution from convertible notes, stock compensation, or increasing outstanding shares can significantly impact a company's earnings per share and should be considered when evaluating stocks.

Transcript

good day fellow investors we continue with our summary on the best investing book out there benjamin graham's the intelligent investor today we're going to talk about chapter 12 what is the price earnings ratio p/e ratio and how to use it Graham first message is don't take a single year's earnings seriously and if you pay attention to short-term ea... Read More

Questions & Answers

Q: Why is it important to focus on real earnings rather than reported earnings when using the P/E ratio?

It is crucial to consider real earnings as reported earnings can be inflated with non-recurring events, impairments, or other charges, giving a distorted view of the company's financial health.

Q: How can investors utilize the P/E ratio effectively for investment decisions?

Investors should analyze a company's P/E ratio in conjunction with average earnings over several years to make informed decisions based on long-term performance rather than short-term fluctuations.

Q: What are some common tactics companies use to adjust their earnings to paint a more favorable picture?

Companies often exclude non-recurring events, such as impairments, stock compensation, or restructuring costs, from their reported earnings to show a better financial performance than what is actually occurring.

Q: How can investors avoid falling into the trap of misleading reported earnings when evaluating stocks?

By scrutinizing a company's financial statements and focusing on real, adjusted earnings rather than just the top-line reported earnings, investors can make more informed decisions and avoid pitfalls.

Summary & Key Takeaways

• Benjamin Graham emphasizes the importance of looking at real earnings over reported earnings when using the P/E ratio for investment decisions.

• The P/E ratio is the ratio of a company's stock price to its reported yearly earnings, usually of the last four quarters.

• Graham advises using average earnings over 7 to 10 years to get a clear picture of a company's performance.