5 ms·

A genie gives you $1 per year in perpetuity. You are engaged in a bidding war to buy the genie and need to figure out your best price. The price you (the market

A genie gives you $1 per year in perpetuity. You are engaged in a bidding war to buy the genie and need to figure out your best price. The price you (the market) are willing to pay is the PE ratio.

ryandrake 3y ago
I mean, you know this, but this is only true for the most basic, dividend issuing non-growth company. Most of the genies don't give you anything per year. Their only value is the amount you can re-sell the genie for. EDIT: I guess I don't understand the "gives you $1" part if we're not talking about dividends.
- OJFord 3y ago
  E is the company's earnings, not what it earns (or rather pays out to in that period) the shareholder. You (and maybe GP) seem to be confusing it with dividend yield?
  - blackoil 3y ago
    As an owner of company, valuation includes both profit withheld and dividend. Think you have 100% of a company with $100 in bank, it makes a profit of $20 and gives $5 as dividend and keeps $15 so now has $115 in account. So, owner got $5 in cash and the book value of company is now 115, and future valuations will reflect on that.
    - Sohcahtoa82 3y ago
      In an ideal world, yes. But in the real world, company valuation is an entirely subjective matter that prices in expected future growth or losses.
    - OJFord 3y ago
      Is it not clear from my parenthetical there that I understand that? > it earns (or rather pays out to in that period) the shareholder Comment I replied to was calling dividends, and only dividends, within a given year we're calculating P/E for no less, the company Earnings. That just isn't correct, whatever your views on valuation, shareholder ownership, and market efficiency.
- bluecalm 3y ago
  Dividends don't matter. The companies just choose to buy stock from you with the profits instead of giving you cash. It's a smarter way because shareholders who want the cash can get it and those who don't can keep reinvesting profits while avoiding triggering tax events.
bluecalm 3y ago
Yeah but why should anyone care about earnings in this exact year? P/E might be useful for your thought experiment about the genie but it's completely useless as a tool to value companies.
- oezi 3y ago
  What? You as the shareholder own the earnings and their use. Earnings thus either become dividends or become re-invested or are used to buy back shares. P/E is the central metric by which to judge stocks on a fundamental level.
  - bluecalm 3y ago
    What I am saying is that P/E is based on current year earnings. It can be quite low but the company is terrible (Intel) or quit big but the company is great but chose not to cash out yet (Amazon from a few years ago). You should care about how much the company is likely to make in coming decades. How much they have made in a current year is a useless metric for that. Profits are not the only thing either. Some assets give political power or power to shape the world. If NVidia made 0 it would still be very valuable because of that.
    - Invictus0 3y ago
      There is something called forward PE which takes into account the company's estimated growth.
- blackoil 3y ago
  PE is only one number, you also look into growth as a factor to calculate PEG. So question now is for how long NVidia can grow at this crazy rate.

A genie gives you $1 per year in perpetuity. You are engaged in a bidding war to buy the genie and need to figure out your best price. The price you (the market) are willing to pay is the PE ratio.

ryandrake 3y ago

I mean, you know this, but this is only true for the most basic, dividend issuing non-growth company. Most of the genies don't give you anything per year. Their only value is the amount you can re-sell the genie for. EDIT: I guess I don't understand the "gives you $1" part if we're not talking about dividends.

OJFord 3y ago
E is the company's earnings, not what it earns (or rather pays out to in that period) the shareholder. You (and maybe GP) seem to be confusing it with dividend yield?
- blackoil 3y ago
  As an owner of company, valuation includes both profit withheld and dividend. Think you have 100% of a company with $100 in bank, it makes a profit of $20 and gives $5 as dividend and keeps $15 so now has $115 in account. So, owner got $5 in cash and the book value of company is now 115, and future valuations will reflect on that.
  - Sohcahtoa82 3y ago
    In an ideal world, yes. But in the real world, company valuation is an entirely subjective matter that prices in expected future growth or losses.
  - OJFord 3y ago
    Is it not clear from my parenthetical there that I understand that? > it earns (or rather pays out to in that period) the shareholder Comment I replied to was calling dividends, and only dividends, within a given year we're calculating P/E for no less, the company Earnings. That just isn't correct, whatever your views on valuation, shareholder ownership, and market efficiency.
bluecalm 3y ago
Dividends don't matter. The companies just choose to buy stock from you with the profits instead of giving you cash. It's a smarter way because shareholders who want the cash can get it and those who don't can keep reinvesting profits while avoiding triggering tax events.

bluecalm 3y ago

Yeah but why should anyone care about earnings in this exact year? P/E might be useful for your thought experiment about the genie but it's completely useless as a tool to value companies.

oezi 3y ago
What? You as the shareholder own the earnings and their use. Earnings thus either become dividends or become re-invested or are used to buy back shares. P/E is the central metric by which to judge stocks on a fundamental level.
- bluecalm 3y ago
  What I am saying is that P/E is based on current year earnings. It can be quite low but the company is terrible (Intel) or quit big but the company is great but chose not to cash out yet (Amazon from a few years ago). You should care about how much the company is likely to make in coming decades. How much they have made in a current year is a useless metric for that. Profits are not the only thing either. Some assets give political power or power to shape the world. If NVidia made 0 it would still be very valuable because of that.
  - Invictus0 3y ago
    There is something called forward PE which takes into account the company's estimated growth.
blackoil 3y ago
PE is only one number, you also look into growth as a factor to calculate PEG. So question now is for how long NVidia can grow at this crazy rate.