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Assume that GWW Cos P/E ratio is 15. Its competitor’s earnings yield is 6.25%.
When comparing GWW Co to its competitor, which of the following is correct?GWW yield 6.7% (1/15)
Competitors yield 6.25% (1/16)GWW PER 15 times (1/6.7%)
Competitors PER 16times (1/6.25%)as we can see that GWW PER is lower and yield is higher, but why in the BPP answer is in the opposite way GWW PER higher and the yield is lower. in which way to looking show that GWW PER is higher? the EPS? because both calculations use EPS
earning yield = EPS/share price @ market value
PER = share price @ market value/EPSso if we look at the EPS for this question, the answer (PER higher, yield lower) will become make sense.
or this answer given is wrong, i had this conclusion is because there are 2 other questions which had given the wrong answer, when i search out for more information and those source where the answer given is more reasonable or close to the information/theory.
The correct answer is that GWW Co’s P/E ratio is higher and its earnings yield is lower compared to its competitor. This may seem counterintuitive, but it can be explained by looking at the EPS (earnings per share) for both companies. The P/E ratio is calculated by dividing the market value (share price) by the EPS, while the earnings yield is calculated by dividing the EPS by the market value.
In this case, if GWW Co has a higher P/E ratio, it means that its market value is higher relative to its earnings per share compared to its competitor. Similarly, if GWW Co has a lower earnings yield, it means that its earnings per share is lower relative to its market value compared to its competitor.
ok, the explanation is great and i understood it clearly. BUT all this is based on the answer, so we know either use share price to get it or EPS. Without knowing the answer and base on what the question asked us, how do we actually know which to use to get the correct answer. And the amount of share price and EPS for both company is unknown.
Example: PER
GWW 15 working : 30/2 OR 45/3
Competitor 16 working : 32/2 OR 48/3(In this case, if GWW Co has a higher P/E ratio, it means that its market value is higher relative to its earnings per share compared to its competitor). Due to lock of information and question ask us to assume, why can’t the GWW PER be lower compare to the competitor, while using share price or EPS.
all this confusion and counterintuitive approach, just for a 2marks questions. Or does it really given the wrong answer, as u said they are human after all
As I am sure you are aware, a higher P/E ratio indicates that investors are willing to pay a higher price for each unit of earnings generated by the company.
However, it is important to note that the P/E ratio is just one measure of valuation and should be considered in conjunction with other factors such as industry trends, company fundamentals, and market conditions.
The P/E ratio alone does not provide a complete picture of a company’s financial health or investment potential.So it is possible that the question is designed to test your understanding of the concept rather than providing a straightforward answer. It is important to carefully analyse the given information and apply the relevant formulas and concepts to arrive at the correct answer.
It’s also possible it’s not clearly written, ambiguous or it could be wrong
Depending on interpretation!For the sake of 2 marks move on!!!
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