Re: [P/E] vs growth of a stock
Let us look at an example.
Company A has current earnings of $1/share.
Company B has current earnings of $1/share.
Company A is expected to show earnings growth of 25%/a for the next ten years.
Company B is expected to show earnings growth of 10%/a for the next ten years.
Which stock will be more expensive?
Obviously company A will trade at a higher price, even though both companies earned $1/share last year.
A reasonable rule of thumb is that the PE ratio / earnings growth should be in the vicinity of 1.
Therefore in the above example, company A is probably trading around $25/share, and company B around $10/share, all else being equal.
Hope that helps.
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