Downside to low P/E ratio?

[d101]

Is there any downside to a company having a low P/E ratio? Why is it that some sectors have much lower PE ratios than others?

 

[burglar]

Is there any downside to a company having a low P/E ratio? Why is it that some sectors have much lower PE ratios than others?

Hi d101,
Welcome to ASF.


http://www.investopedia.com/university/peratio/peratio2.asp

Although it is American, "investopedia" is a great source of information.
No BS, ... no opinions.

 

[tinhat]

A company's share price will generally reflect the market's expectations of future earnings. The stated P/E is a historical figure as it provides the current price as a ratio to the last reported earnings. Generally when a company has a low P/E it reflects that the market's expectation is that future earnings will fall. How far ahead does the market look? Some suggest that the market only looks about two years ahead.

 

[Valued]

The P/E ratio does not provide any objectivity. A high P/E company could be a bargain and a low P/E company could be overpriced. The P/E doe not tell you anything about the company's future prospects. I also do not think it is wise to concentrate on P/E ratios between different companies in the same sector and then trying to discover if a stock is cheap based off that. Perhaps a stock is trading at a low P/E ratio since the company has a lot of debt, has shown negative cash flow or just has poor returns. Perhaps a stock is trading at a high P/E ratio due to unjustified optimism. A lot of good comes from reading the balance sheet and cash flow statements.

 

[Country Lad]

...................The P/E doe not tell you anything about the company's future prospects.

I don't know about that. High P/E generally means that the market thinks the earnings are going to rise over the next year or so. Low P/E means that the market thinks that the earnings will fall. An extremely low P/E could very well mean there isn't a great deal of confidence it will survive.

Cheers
Country Lad

 

[Valued]

I don't know about that. High P/E generally means that the market thinks the earnings are going to rise over the next year or so. Low P/E means that the market thinks that the earnings will fall. An extremely low P/E could very well mean there isn't a great deal of confidence it will survive.

Cheers
Country Lad

The P/E ratio may identify what the market thinks the company's prospects are but it cannot tell you what the prospects are in actuality. I like to consider why the market believes a prospect is good or bad and then consider if that is accurate.

 

[So_Cynical]

The P/E ratio is just a measure, an indicator, a number...just another factor to consider or totally ignore.

 

[Valued]

The P/E ratio is just a measure, an indicator, a number...just another factor to consider or totally ignore.

I think people read too much into it but each to their own. I am sure some people who consider the P/E ratio to be highly important are beating the market.