When the Facebook IPO was the big
news, there was someone on Bloomberg who was taking about amount the total
investment behind Facebook compared to the amount of money they generated. This
was when it “clicked” for me that any stock with a positive P/E ratio, has more
investment than net profit. This is what really sparked my interest in P/E
ratios and other questions like what is considered a typical P/E ratio and how
do P/E ratios fluctuate over time. So then doesn’t this mean that these are
inflated markets? (Markets where stocks
are valued at more than they can earn in a year) How can it be that a
company with a P/E ratio of say 11 is considered relatively cheap? ( The
selling price of a stock at 11 times the net profit of a business is cheap?) Does
a company with a positive P/E ratio have an inflated value? How can we value
anything at more than the profits it produces? Doesn’t it seem illogical to
value a company at By allowing any
publicly traded entity to trade at price above its yearly earnings are we
allowing the public to inflate its value?
This sparked a large idea for me; if
you agree that we do indeed inflate the value of companies by allowing them to
trade at a price above their total earnings per year are, could we inflate the
value of other business entities besides large cooperation’s? Maybe as long as
everyone else agrees with you? Idk what do u think? Is it rational to value
publicly trade companies at a price above net profits? Personally I don’t think
its very rational, however I understand that since everyone else thinks it is
reasonable it makes it work.
What I really want is a open
discussion on this blog. Leave a comment, challenge something I said, voice
your own opinion or just read my blog and keep your thoughts to yourself…but
that no fun.
No comments:
Post a Comment