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why CAPM is not proper for companies with low P/E ratio?

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › why CAPM is not proper for companies with low P/E ratio?

  • This topic has 3 replies, 3 voices, and was last updated 12 years ago by John Moffat.
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  • May 27, 2011 at 7:29 am #48664
    Anonymous
    Inactive
    • Topics: 3
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    why CAPM is not proper for companies with low P/E ratio?

    May 29, 2011 at 6:37 pm #82396
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54761
    • ☆☆☆☆☆

    In theory, CAPM would apply to any shares. However, we do not have a perfect market, and a low PE (relative to other companies in the same sort of business) could suggest that the share is being undervalued.

    November 18, 2012 at 12:18 am #82397
    dazhong0703
    Member
    • Topics: 44
    • Replies: 130
    • ☆☆

    So P/E ratio low, is it because share is undervalued, or shareholders’ value is low? What other factors need to consider to get a more appropriate conclusion, pls? Thank you.

    November 18, 2012 at 9:11 am #82398
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54761
    • ☆☆☆☆☆

    A low PE suggests that maybe the share is undervalued. (The value of the share itself might be high or might be low).
    Other things you might look at for confirmation are the historical growth (compared with similar companies), any knowledge of the companies future plans that might have affected expectations, even the asset value.

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