If the p/e of Coca-Cola is 15, you’d expect... - Deepstash

If the p/e of Coca-Cola is 15, you’d expect the company to be growing at about 15 percent a year, etc.

But if the p/e ratio is less than the growth rate, you may have found yourself a bargain. A company, say, with a growth rate of 12 percent a year (also known as a “12-percent grower”) and a p/e ratio of 6 is a very attractive prospect.

On the other hand, a company with a growth rate of 6 percent a year and a p/e ratio of 12 is an unattractive prospect and headed for a comedown.

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THE PRICE/EARNINGS RATIO

We’ve gone on about this already, but here’s a useful refinement: The p/e ratio of any company that’s fairly priced will equal its growth rate.

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