Why PE Ratio is the Misunderstood Metric
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A high P/E does not tell you that stock is overvalued and a lower P/E does not mean that stock is undervalued.
P/E is simply just another metric and what it reflect is "Investor's perception about Company's Future Earnings"
Its shows "How Much investors are willing to pay for every $1 of Earnings"
In September 2021, Meta Platforms' stock reached a high of $385 with a PE ratio of 28. However, by March 2022, the stock had dropped almost 50% from its peak, with a PE ratio of 14. As a value investor, investing solely based on PE ratio, one may have believed that Meta Platforms was undervalued at a PE of 14, as it was historically trading at a PE of 28. However, even with the discounted price, the investment would have resulted in a loss of 40-50%.
P/E is simply just another metric and what it reflect is "Investor's perception about Company's Future Earnings"
Its shows "How Much investors are willing to pay for every $1 of Earnings"
In September 2021, Meta Platforms' stock reached a high of $385 with a PE ratio of 28. However, by March 2022, the stock had dropped almost 50% from its peak, with a PE ratio of 14. As a value investor, investing solely based on PE ratio, one may have believed that Meta Platforms was undervalued at a PE of 14, as it was historically trading at a PE of 28. However, even with the discounted price, the investment would have resulted in a loss of 40-50%.
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Finasko.com has provided a detailed guide on P/E Ratio
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