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What is the optimal P/E ratio? Some investors say that low is good whereas others as well as the BPP text say that if its as high as possible, the better.
There are really different opinions on P/E ratio. Some want high, some want lowWhat is the actual optimal P/E ratio which companies should have? Should it be very high or should it be low?
Thanks in advance
There is no such thing as an optimal PE ratio!
I assume that you have watched my free lectures, and therefore you will appreciate that the PE ratio is an indicator of the future growth that the shareholders are expecting. The greater growth in the future that shareholders are expecting, then the greater will be the share price, and therefore the higher will be the PE ratio.
The expectation of future growth depends partly on the type of business – some sectors will be expected to grow more than others and some less – and partly on how well the particular business is being managed,
The PE of a specific company should be compared with the average PE for their type of business. If it is higher then shareholders are expecting it will grow more than similar companies, if it is lower then they are expecting it will grow less than similar companies.
If you have not watched the free lectures, then I do suggest that you do watch them.
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