Justified P/E ratio difference, meaning, between, studying, everyone

Zesty

Hey everyone,

I was wondering if someone could shed some light onto the term Justified P/E ratio.

What is the difference between a justified P/E ratio and the normal P/E ratio in its meaning/calculation?

Thank you for all of your help! Good luck studying!

IAmNeil

elcfa Wrote:
-------------------------------------------------------
> I thought it is level II stuff, no?
>
> Justified PE can be either leading/forward or
> trailing. It is the P/E derived from expected
> payout ratio, expected return and growth rate.
>
> o Leading= (1-b)/(r-g)
> o Trailing= (1-b) (1+g)/(r-g)
>
> It is different from real P/E which is just
> Price/Earnings. Comparing those two ratios can
> give you indication whether the stock is
> 'overvalued' or not.

Elcfa is right. Justified PE is what the PE should be based on "forecasted" fundamentals while what you call the "normal" PE is the current market price divided by the earnings which may be leading (future earnings) or trailing (previous earnings).

If the justified forward PE is higher than "normal" PE, then the stock is undervalued...

strikethree

I thought it is level II stuff, no?

Justified PE can be either leading/forward or trailing. It is the P/E derived from expected payout ratio, expected return and growth rate.

o Leading= (1-b)/(r-g)
o Trailing= (1-b) (1+g)/(r-g)

It is different from real P/E which is just Price/Earnings. Comparing those two ratios can give you indication whether the stock is 'overvalued' or not.