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Kindle Notes & Highlights
“Yes, they take the day-to-day decisions, but they do not own the business. You own it. They manage it for you.” “Ah! Interesting. It seems as if they are working for us.”
“They are. Do not even have an iota of doubt about that. They are answerable to all shareholders and owners of the business, including you.”
we need to treat this as buying a business and not just a simple commodity.
what it means is that different industries and the companies within that industry have a kind of a standardized P/E ratio?”
“Well, we can’t say a standard P/E for an industry because over a long period, the growth prospects of an industry might c...
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undergo a change, but yes the industries do have an average P/E t...
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“We don’t, but remember that the current stock price already accounts for the high P/E and therefore the high growth potential. If you buy the stock at the current price, which is above the industry average, your investment is not likely to grow much.
A higher P/E could indicate either of the following: High confidence in the company, i.e. investors maybe expecting high future earnings of the company or they may believe that the company is on a high growth path. Highly overpriced stock, i.e. it could just be possible that stock is overpriced leading to high P/E with no significant justification for such high P/E. This is quite a possibility since the market prices are mostly sentiment driven.
“Similarly, a low P/E could indicate thumbs down from the market for the company or a stock available at a wonderful price.
earnings represent the real data from the company books, the current price of the stock may be sentiment driven and therefore, can drive the current P/E ratio to also be sentiment driven, right?”
“We need to get to a more robust, a surer, a more reliable P/E of the company, which can be calculated by looking at the historical P/E numbers for the company over an extended period of time. This robust, reliable P/E for the company usually stands time tested and does not change over a very long period of time – say 10 to 20 years.
While earnings of the company may keep going up or down, based on competition or performance, and other economic scenarios, the essence is proportionately reflected in the stock price sooner than later. Therefore the ratio P/E tends to maintain its value in spite of all earnings fluctuations. And this longterm P/E ratio, which is stable, robust and reliable, can be said to be the ‘intrinsic P/E© of the company’.
“The significance is that such outliers, if any, like 2009-10 P/E should be excluded when we calculate the Intrinsic P/E© of Asian Paints over the 9-year period.”
“Now, for most of our calculations, the average P/E should be the intrinsic P/E© for Asian Paints i.e. 30.25. But in the most optimistic scenario, the P/E that you can potentially assume is 39.83 (the most recent) + 5.28 percent growth, that is 41.93.”
