Question

4. The table below presents the historical P/E ratio for Apple Inc. The P/E ratio increased from 2002 to 2003, and then decreased for a few years. a. Please explain how the increase and decrease of P/E ratio reflect investor view about Apple. (2 points) b. The current P/E ratio of Apple is 33.7. If we use the past 10 years average P/E ratio (from 2010-2019) as a benchmark, is Apple currently underpriced, fairly priced or overpriced? Please explain. (3 points)

Year P/E ratio

2002 80.6

2003 109.1

2004 52.4

2005 32.5

2006 32.6

2007 38.0

2008 20.7

2009 20.1

2010 18.4

2011 13.6

2012 14.9

2013 11.9

2014 15.5

2015 11.9

2016 13.5

2017 16.6

2018 18.8

2019 18.2

Answer 1

a)

P/E ratio is the ratio of a company's share price to its earnings per share. If we look at the P/E Ratio of Apple Inc. , we can find that the ratio is not stable. It increases with a great margin from 2002 to 2003 and then decreases. Again the ratio increases in 2007 and then falls down. In this way, there is an inconsistency. An investor usually considers a company's P/E Ratio to assess the value of its stock. The past records can help in predicting the future trend of the share price. We can not say that the P/E ratio hasn't influenced the investment decision of people in Apple Inc. While there was a hike in the ratio in 2003 most people have considered a good opportunity and have made an investment in the company. Similarly, when the ratio went down in later years, most of them have withdrawn their investment too.

But for the one who analyses the trend for some years, it will be visible that the share prices and ratio are not consistent and a sudden increase or decrease can not predict the future price/ value.

b)

The past 10 years' average P/E Ratio is 17.34.

Given the current P/E Ratio is 33.7, if we use the past 10 years' average P/E Ratio as a benchmark, Apple will definitely be under priced.

That's why we can conclude that the past data alone doesn't help in predicting the future or current value of stocks.

It helps in analyzing the trend. The price/ value of the shares depend upon so many other factors.