KO trades at 20x trailing earnings. DIS trades at 19x trailing earnings. GE trades at 12x trailing earnings. GOOG trades at 22x trailing earnings. Each company has completely different growth rates, earnings drivers, profit margins, risks, and...issues. So they are all evaluated by different elements, but they are also evaluated relative to each other, and to the "market," which most people define as the S&P 500, best tracked by ticker: SPY.
So if the "market" is at 19x earnings, then GOOG trades at a 3x relative multiple premium to it, and GE trades at a 7x discount to it...all of these valuations, usually for good reason. Until something changes. And it always does.
Related or Semi-related Video
Finance: What is Price-to-earnings-to-gr...5 Views
Finance Allah shmoop what is priced toe earnings to growth
or a peg ratio You know what the P E
ratio is right And if you don't I'll check out
our fine opus on said Subject Here it's him up
So price here's build a bore Stock trading at forty
bucks a share It had net income or earnings last
year of two bucks a share in trades at yes
twenty times earnings So that's a P and in hee
price and in earnings there it trades at twenty times
earnings Um yeah So what does that mean Well if
it held the earnings flat and basically all of its
earnings was cash earnings Not like some fancy accounting trick
Well if earnings were flat for twenty years well the
company would have made back all of its valuation in
cash profits and everyone would yawn right Twenty years at
two bucks a year twenty times two is forty right
Well that company would have paid up five percent cash
return yield Right Two bucks in earnings over forty bucks
a share to over forty in California and in Texas
is five percent So is that a good return about
return Was there a lot of risk in that number
Growth shrinkage Wealth in a peg ratio Earnings growth is
taken into consideration when evaluating the ratios of a stock
So twenty times earnings is kind of a ho hum
multiple But this company has no growth so that twenty
times is probably a pretty high multiple as a multiple
You know all things considered like twenty years a long
time to get all your money back What if earnings
were doubling each year for the next five years Like
earnings went from two to four to eight to sixteen
to thirty two bucks a share Well then twenty times
earnings was ludicrously cheap Growth was one hundred percent versus
that zero percent where twenty times earnings Look you know
decent Well the basic idea and this one is coined
by Peter Lynch the famed portfolio manager who brought Fidelity
to fame Is that a peg ratio of one means
that a stock is basically fairly priced that is P
E ratios need contexts specifically the context of earnings growth
The formula takes the P E ratio say it's a
twenty and then puts it over the annual earnings per
share growth number and note that it's per share not
just overall company earnings Like if a company grew earnings
by acquiring for stock a lot of competitors well it's
share count would balloon While it's earnings grew fast as
well but likely the dilution and suffered would mitigate most
of the upside in earnings growth So on our twenty
times earnings number a company with no growth gives us
a peg ratio of twenty over zero which is an
undefined number But peg ratio is all about how expensive
the price to earnings ratio is relative to the growth
of the company Wow we did not see that plot 00:02:45.65 --> [endTime] twist coming yellow
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