Tuesday, February 11, 2014

Animal Spirits And The Math Of The Market Multiple

The Price Earnings Ratio is perhaps the most commonly used valuation tool. We all know and love the Price Earnings Ratio (P/E Ratio). But do we know what it means? And do we know what in our opinion it should be? We all know how to calculate it: It is Price Divided by Earnings. But that gives you what it is. It does not tell you what it means. To understand what it means, you must understand the Math of the Multiple. And that will allow you to both understand what it means, and calculate what, in your opinion, it should be.