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No, you have this precisely backwards. The cash increases its PE. The easiest way to illustrate this is to imagine they had 1 trillion in cash instead of 280 b
by yeldarb 9y ago
No, you have this precisely backwards. The cash increases its PE.
The easiest way to illustrate this is to imagine they had 1 trillion in cash instead of 280 billion. Their market cap would go up 720B meaning their PE would increase.
Conversely, if their cash decreased so would their PE.
- ericd 9y agoYou're right that if their cash decreased their PE would go down, all else equal. But if they used it to fund a promising venture that would likely increase their future earnings more than clipping coupons on the equivalent in t-bills or whatever their cash is sitting in, then their price would probably go up. And so the fact that they allow so much cash to build up might drag down their P/E relative to other companies, counterintuitively.
- harryh 9y agoYou're right. I was totally backwards. I...cannot explain how I screwed that up in my head. Thanks for the correction.