Many people wrongly believe that value investing involves finding companies boasting low P/E multiples.
- But not all low P/E stocks are good investments, and not all high P/E stocks are bad investments.
- Nor do value investors consider the P/E ratio as an insightful measure for valuation purposes, though it might be useful as a check against overpaying.
Value investors resist the temptation to use P/E ratios as supplements to a traditional valuation analysis.
- Value investors consider the income statement and the balance sheet as sources of information concerning business value.
- These are superior to market-oriented tools such as the P/E ratio for two reasons.
2. Second, return on equity is an intrinsic or internal valuation methodology, whereas P/E ratios are products of market or external or valuation processes.