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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A slightly more complicated formula enables us to compare growth rates to earnings, while also taking the dividends into account.
Find the long-term growth rate (say, Company X’s is 12 percent), add the dividend yield (Company X pays 3 percent), and divide by the p/e ratio (Company X’s is ...
If you find a business that can get away with raising prices year after year without losing customers (an addictive product such as cigarettes fills the bill), you’ve got a terrific investment.
One more thing about growth rate: all else being equal, a 20-percent grower selling at 20 times e...
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.
I’m talking about growth rate of earnings here. How do you find that out? Ask your broker what’s the growth rate, a...
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