Friday, 25 June 2010

Comparing P/E ratios to growth rates can be significantly more useful than simply comparing two companies' P/E ratios. Why?

Let's compare Company A to its competitor in the same industry Company B to illustrate.

Company A

Price $10

Last year's EPS $1.16

Projected EPS  $1.33

Company B

Price $ 8

Last year's EPS  $1.14

Projected EPS  $1.14

Using the data above, you can see that Company A's trailing P/E is 8.6, while Company B's is just 7.

Why would you want to pay $10 for Company A's earnings when you can get Company B's - the same amount, no less  - for $2 off?  (You could even take the $2 to give yourself a treat. )  :-)

Which company would you buy - Company A or Company B?  Why?

Answer:  Click here.

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