Valuation is an art, and price-earnings ratio is an art. How many times the price-earnings ratio of a company is worth? Different people have different opinions and wise people have different opinions.
- The P/E ratio of longevity companies can be slightly higher than that of non-longevity companies. Most companies have limited life expectancy, and longevity companies should have higher P/E ratios, because the length of life will affect the total amount of cash flow in the future.
- The price-earnings ratio of the leading market is slightly higher than that of the non-leading market. This is true in mature markets. Because the leading company gets the result of competition through its own struggle, customers'voting. It is the embodiment of competitiveness. Competitiveness ensures future cash inflows.
- The P/E ratio of companies with less risk can be slightly higher than those with higher risk (e.g. those with higher leverage). Because the risk discount is smaller, a smaller discount rate can be obtained.
- Companies with larger space and higher profit growth should have higher P/E ratios than companies with the opposite. Because such companies can provide more cash flow in the future. This is also the logic of the PEG approach.
Fifthly, firms with sound financial statements should have higher P/E ratios than firms with aggressive financial statements. To quote one of my respected bloggers who said, "Eating Yin Food is my own thing, and eating Yin Food is a crime".
- Firms with high certainty and stability should have higher P/E ratios than those with the opposite. It is not totally unreasonable for a brokerage firm to create the term "profit visibility".
- Where liquidity is good, there should be a premium over where liquidity is poor, and the price-earnings ratio can also be higher. B shares, for example, are typical liquidity discounts. For example, houses that are restricted to purchase or sale are also subject to certain discounts.
- Excellent management can enjoy a premium over mediocre management. Because performance is done by people, good management can obviously increase this probability. Some innovative drug companies have no products and no profits, but enjoy a high valuation, which is directly related to this.
- Companies with high free cash flow should have higher P/E ratios than companies with opposite free cash flow. Buying a company is the discount of the company's future free cash flow. This "freedom" is very important. Many companies'profits have the taste of "wealth on paper".