Question

How can a company with a high ROE have a low P/E ratio?

Answer 1

Accounting-based valuation suggests that the stock price, a numerator of the PE ratio, can be viewed as the sum of the current book value per share plus the discounted expected future abnormal earnings per share. A company with a high ROE may have a low price and PE ration when cost of equity capital is high, when expected growth of book value is low, and when expected future ROE is low. A company with a high ROE may have a low Market price and PE ration when cost of equity capital is high, when expected growth of book value is low, and when expected future ROE is low.

This companies are having a high income with less time for survival its kind of fast moving companies.

The Formulas for ROE is =             NET INCOME

                                               SHARE HOLDERS EQUITY

                       (I.e EPS)

The Formula for PE Ratio is = MARKET PRICE PER SHARE

                                                     EARNINGS PER SHARE

If ROE i.e EPS is high and Market price is low the Company will have lower PE Ratio. But ROE is high due to high income but with less Growth in future.