Advantages and disadvantages of the PE ratio
Due to the disclosure obligation, the profits of companies can be easily viewed, so that investors can compare the share price with other companies. Moreover, the calculation is relatively simple for laypersons. The price-earnings ratio helps to identify valuable companies that are undervalued in the market.
With an early investment, solid to exorbitantly high returns can be achieved when the share price rises later. Another advantage is that the ratios are relatively easy to understand, at least on a superficial view. For a first impression, the PE ratio is definitely a good point of reference. The price-earnings ratio is an ideal tool for investors who have a long-term strategy. Only with important ratios is it possible to invest systematically in financial assets.
Advantages at a glance:
- Easy to determine
- Understandable for laypersons
- Good comparison possibilities
- Finding undervalued companies
- High profit potential
The PE ratio also has its limits, or rather there are disadvantages for investors. The latter can only fall back on ratios based on past earnings. Although current profits can be viewed, no trend can be derived for the future. At this point, experts work with forecasts, which, however, are only reliable to a limited extent. It remains unforeseeable to what extent a positive trend will remain constant in the future.
Furthermore, it is not always possible to determine a value, for example when companies do not generate a profit. Thus, a comparison - depending on economic performance - is impossible. The results are not always precise and can distort the overall picture. Profits are determined in different ways and every company tries to push the figures up as much as possible. Although it is forbidden by law and key figures have to be reported to BaFin, manipulation cannot be ruled out.
Disadvantages at a glance:
- Past-oriented values
- Future calculations are based on forecasts
- Calculation only possible if profits are made
- Actual profits can be glossed over by companies
Use price-earnings ratio (P/E ratio) in combination with price-cash-flow ratio (KCV)
If a comparison and evaluation of different companies has taken place with the P/E ratio, the price-cash-flow ratio in Singapore Exness must also be included. As already mentioned, the P/E ratio is only one fragment of many, which is ultimately part of the overall picture. In order to get a realistic overall picture, the KCV value should not be neglected. It is of substantial importance, especially in cases where the P/E ratio of companies is identical.
The calculated value for the P/E ratio does not reflect the real annual profit of a company, or the sum of the profits is not fully available to the company.
This is precisely where cash flow gains in importance. Because the cash flow is the profit that remains for the company after tax deduction. In addition, cash flow takes into account depreciation, including increases in reserves. The cash flow ultimately reflects the actual income that is freely available to the company.
One also speaks of the earning power of a company. The better the earning power, the more economically the company operates. High-earning companies have better room for manoeuvre and are more resistant to crises. Investors should therefore include the cash flow in their analysis. The KVC is calculated by dividing the stock market price and the estimated cash flow per share.
