Valuation Question
Hypothetical situation:
Company AAA has 0 long term debt; normal current assets and liabilities i.e. enough to have sufficient liquidity in its economic transactions; and basically only long term assets that generate cash flow such as property,plant, and equipment. The PE is 10 and a Price to Book Value ratio of 1.
Company BBB is identical to company AAA except that it has additional cash assets (just money collecting short term interest) not related to current operations the make it's book value 50% more than company AAA.
Revenue and earnings past and in the future are identical. Should company BBB have a PE of 10 since it's earnings and revenues are identical i.e. future cash flows are identical? My answer is no. Hopefully I phrased this question in a way that is understandable.
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