"Why do some companies have a very high PE and low EPS or a low PE and high EPS? This raises a red flag to me when I see a company like US Steel (X $27.37) with a EPS of $18 and a PE of 1.5?"
Here's what it means:
A PE ratio is the stock price per share divided by the earnings per share.
Businesses are valuable to their owners because of the money they make (the earnings). When an owner decides to set a price to sell the business, they take into consideration the money they are likely to make in the future if they kept the business.
If it's a wonderful business (a.k.a. a "Rule #1 company"), the owner is quite certain to make money from the business for many years into the future. For that reason, no owner of a wonderful business will sell it for just the earnings they were going to make in the next year.
Owners insist on a price that reflects the certainty of the future earnings -- some multiple of today's earnings.
Continue reading "What it Means When PEs and EPS Don't Add Up" »
Recent Comments