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This is nonsense. P/E is a measure of earnings against the price of one share. A high P/E does show that current earnings are small (or negative) in relation

This is nonsense. P/E is a measure of earnings against the price of one share. A high P/E does show that current earnings are small (or negative) in relation to share price, but there's no time component inherent in P/E.

brucephillips 9y ago
There absolutely is. For a company to be valuable, it must return more profit to shareholders than they put in. The P/E ratio indicates how long it will take for this to happen.
- jonknee 9y ago
  Not really, it indicates how long if nothing changes over the long term. Which never happens. Netflix is growing very rapidly which makes P/E all but meaningless for "how long" questions.
  - edpichler 9y ago
    You are right. Today it represents just an expectation. On future, the P/E will decrease and stabilize after the company make profit and consolidate.
    - jonknee 9y ago
      It doesn't really even represent an expectation because nobody expects their financials to stay the same. Forward P/E fits that bill a little better.
  - brisance 9y ago
    The metric that Netflix uses is subscriber count, and all indications is that the subscriber count is not growing at a pace that explains the PE ratio. In fact the growth is declining as evidenced by their guidance for the quarter. http://www.businessinsider.com/netflix-q4-earnings-report-analysis-subscribers-revenue-eps-2018-1 http://www.businessinsider.com/netflix-q4-earnings-report-an...
- rtpg 9y ago
  That's under the assumption that all you can do with a stock is hold onto it and pocket all the profits. If I buy a house, put in a pool, then sell the house for $100k more than I bought it a year later, it doesn't matter too much what the initial price was, except in comparison to other investments You can always sell the Netflix stock after pocketing some dividends or something. The purchase price is not money lost, because now you have the stock. I get P/E being important for someone trying to buy a company.
  - edpichler 9y ago
    You are right, but I am talking about investing for long term. For short term, most of the time, just the price chart is analysed. Just to write here, long term and short term (speculation) is totally different. I was talking just about very long term.
  - roenxi 9y ago
    In raw "what is possible" terms I cannot fault you. But I really like the idea of fundamentals, and "what is likely" is a different kettle of fish. In a sense, share prices compete with the cost of starting a new company that does the same thing. P/E ratios of 230:1 mean an increasing risk that instead of someone buying your shares, they go and start a competitor. Then everyone buys that competitor instead. In any market there is an upper limit to the P/E ratio, and nobody wants to be the buyer who finds it. Especially if the company's income doesn't rise; because then you have to sell at a loss to recover any money. In practice, there is also the risk of catching a collapse in the market. They happen that, once every decade or so? Great time to be able to rely on an income stream when that happens.
js2 9y ago
edpichler's description of P/E is correct. Quoting from wikipedia for a slightly more formal definition: "Trailing P/E" uses the weighted average number of common shares in issue divided by the net income for the most recent 12-month period. This is the most common meaning of "P/E" if no other qualifier is specified. https://en.wikipedia.org/wiki/Price–earnings_ratio https://en.wikipedia.org/wiki/Price–earnings_ratio
- mobilefriendly 9y ago
  Yes earnings is for the past 4 quarters but by time component I mean his assertion that "P/E ratio 230.24 is meaning that you need 230 years of profits to return to you the price you are paying today" which is utter nonsense.
  - deleted 9y ago
    [deleted]
  - js2 9y ago
    Perhaps it would help if you could explain why it's wrong instead of calling it utter nonsense, because it matches my understanding of P/E ratio. Here's the example from the same wikipedia link: As an example, if stock A is trading at $24 and the earnings per share for the most recent 12-month period is $3, then stock A has a P/E ratio of 24/3 or 8. Put another way, the purchaser of the stock is investing $8 for every dollar of earnings. Now say the company behind stock A is paying out 100% of its earnings as a yearly dividend of $3/share and is taking no additional investment, so it isn't growing. It's going to take 8 years (the P/E) to recoup the $24.
    - whatok 9y ago
      I've never seen a years recouped metric in reference to P/E used in a professional context ever. You don't see it because you're holding everything static. This makes no sense (particularly in the case of growth stocks) because the whole point is that you're expecting growth in earnings and that number is going to wildly change over time periods and what earnings you use. One of the biggest reasons why P/E is a relevant metric is that it enables you to easily compare stocks between one another.
edpichler 9y ago
A high P/E shows that the current profits are very far from the stock price. The expectation of grow are high. Good companies has high P/E too. On this case, 230 P/E is a really high expectation.

brucephillips 9y ago

There absolutely is. For a company to be valuable, it must return more profit to shareholders than they put in. The P/E ratio indicates how long it will take for this to happen.

jonknee 9y ago
Not really, it indicates how long if nothing changes over the long term. Which never happens. Netflix is growing very rapidly which makes P/E all but meaningless for "how long" questions.
- edpichler 9y ago
  You are right. Today it represents just an expectation. On future, the P/E will decrease and stabilize after the company make profit and consolidate.
  - jonknee 9y ago
    It doesn't really even represent an expectation because nobody expects their financials to stay the same. Forward P/E fits that bill a little better.
- brisance 9y ago
  The metric that Netflix uses is subscriber count, and all indications is that the subscriber count is not growing at a pace that explains the PE ratio. In fact the growth is declining as evidenced by their guidance for the quarter. http://www.businessinsider.com/netflix-q4-earnings-report-analysis-subscribers-revenue-eps-2018-1 http://www.businessinsider.com/netflix-q4-earnings-report-an...
rtpg 9y ago
That's under the assumption that all you can do with a stock is hold onto it and pocket all the profits. If I buy a house, put in a pool, then sell the house for $100k more than I bought it a year later, it doesn't matter too much what the initial price was, except in comparison to other investments You can always sell the Netflix stock after pocketing some dividends or something. The purchase price is not money lost, because now you have the stock. I get P/E being important for someone trying to buy a company.
- edpichler 9y ago
  You are right, but I am talking about investing for long term. For short term, most of the time, just the price chart is analysed. Just to write here, long term and short term (speculation) is totally different. I was talking just about very long term.
- roenxi 9y ago
  In raw "what is possible" terms I cannot fault you. But I really like the idea of fundamentals, and "what is likely" is a different kettle of fish. In a sense, share prices compete with the cost of starting a new company that does the same thing. P/E ratios of 230:1 mean an increasing risk that instead of someone buying your shares, they go and start a competitor. Then everyone buys that competitor instead. In any market there is an upper limit to the P/E ratio, and nobody wants to be the buyer who finds it. Especially if the company's income doesn't rise; because then you have to sell at a loss to recover any money. In practice, there is also the risk of catching a collapse in the market. They happen that, once every decade or so? Great time to be able to rely on an income stream when that happens.

js2 9y ago

edpichler's description of P/E is correct. Quoting from wikipedia for a slightly more formal definition: "Trailing P/E" uses the weighted average number of common shares in issue divided by the net income for the most recent 12-month period. This is the most common meaning of "P/E" if no other qualifier is specified. https://en.wikipedia.org/wiki/Price–earnings_ratio https://en.wikipedia.org/wiki/Price–earnings_ratio

mobilefriendly 9y ago
Yes earnings is for the past 4 quarters but by time component I mean his assertion that "P/E ratio 230.24 is meaning that you need 230 years of profits to return to you the price you are paying today" which is utter nonsense.
- deleted 9y ago
  [deleted]
- js2 9y ago
  Perhaps it would help if you could explain why it's wrong instead of calling it utter nonsense, because it matches my understanding of P/E ratio. Here's the example from the same wikipedia link: As an example, if stock A is trading at $24 and the earnings per share for the most recent 12-month period is $3, then stock A has a P/E ratio of 24/3 or 8. Put another way, the purchaser of the stock is investing $8 for every dollar of earnings. Now say the company behind stock A is paying out 100% of its earnings as a yearly dividend of $3/share and is taking no additional investment, so it isn't growing. It's going to take 8 years (the P/E) to recoup the $24.
  - whatok 9y ago
    I've never seen a years recouped metric in reference to P/E used in a professional context ever. You don't see it because you're holding everything static. This makes no sense (particularly in the case of growth stocks) because the whole point is that you're expecting growth in earnings and that number is going to wildly change over time periods and what earnings you use. One of the biggest reasons why P/E is a relevant metric is that it enables you to easily compare stocks between one another.

edpichler 9y ago

A high P/E shows that the current profits are very far from the stock price. The expectation of grow are high. Good companies has high P/E too. On this case, 230 P/E is a really high expectation.