Question

Every public company has a P/E ratio. It is the current market value per share of the company divided by the expected future earnings of that company. Many investors use this ratio as a method of determining the relative value of a stock because it tells that investor how much you are paying for each $ of future earnings. For example, Coca-Cola with a P/E ratio of 20 tells you that you are paying $ 20 a share for every $1 of future earnings; conversely Amazon with a P/E ratio of 115 tells you that you are paying $ 115 a share for every $1 of future earnings.

A P/E ratio can be low or high and it is your job to determine why.

1) a P/E can be low because investors are losing confidence in the company and they are selling shares even though the earnings stay the same

2) or a P/E can be low because earnings are growing quickly and the current market price hasn't picked up on this earnings growth yet.

3) or a P/E can be high because investors become excited about a company (such as Tesla) and investors will buy the shares now in the hopes that the earnings will eventually increase

4) or a P/E can be high because earnings are actually falling and investors haven't picked up on this yet - investors are holding out in the hopes that earnings will recover.

Additionally, a P/E ratio should be analyzed in relation to the company's industry, competition, product line , its debt and its position in the economy.

Thus, I would like you to report on the P/E ration for your two companies. How has the P/E ratio changed (up or down) and why? What is driving the trend in the movement of your P/E ratio? How does the P/E from your two companies compare to other companies in the same industry. There is no one answer here - it is your analysis from what you see in the company.

Can you provide a summary of at least 20 sentences and I hope you enjoy this exercise.

Answer 1

The two companies are P&G (Procter and Gamble) and GE (General Electric). P&G’s P/E ratio is 63.62. The company’s P/E ratio has been showing an increasing trend and has been growing over the years. For instance in 2008 it was 10.25, in 2011 it went to 12.52, in 2014 it touched 19.77, in 2017 it touched 23.53 and then it started shooting up since June 2019 onwards. The P/E of P&G is higher when compared to its competitors in the same industry. This is because of the fact that P&G has a broad portfolio of products and brands and is present across the globe and so investors have confidence with regards to future growth of the company.

GE’s P/E ratio is 12.57. The company’s P/E ratio has been increasing over the years but in a gradual manner. The company enjoys leadership in aviation engines and healthcare equipment. Besides it is also a strong player in the power sector as well. The P/E of GE is higher than its competitors because of the fact that GE is a very large company and its competitors cannot match it in terms of size and scale of operations. GE is well placed to gain from its leadership in the segments in which it operates and hence investors are confident about the company’s future and optimistic about its earnings growth going forward.