Justified P/E ratio

[GreenTomato]

Hey everyone,
I was wondering if someone could shed some light onto the term Justified P/E ratio.
What is the difference between a justified P/E ratio and the normal P/E ratio in its meaning/calculation?
Thank you for all of your help! Good luck studying!

 

[janakisri]

Don’t know what you mean by normal, maybe you have a particular calculation in mind.
What I remember from L.2 is that we have trailing P.E. which is based on the past and is given as:
Justified PE=(Payout Ratio)(1+g)/(r-g)
Also we have the forward P.E. which is based on future growth in earnings and is equal to
Forward PE=(Payout Ratio)/(r-g)
As you can see the two differ by a growth term, so given current earnings , payout ratio and price, the frm should become (1+g) times cheaper to own owing to growth

 

[elcfa]

I thought it is level II stuff, no?
Justified PE can be either leading/forward or trailing. It is the P/E derived from expected payout ratio, expected return and growth rate.
o Leading= (1-b)/(r-g)
o Trailing= (1-b) (1+g)/(r-g)
It is different from real P/E which is just Price/Earnings. Comparing those two ratios can give you indication whether the stock is ‘overvalued’ or not.

 

[me.tega]

elcfa Wrote:
——————————————————-
> I thought it is level II stuff, no?
>
> Justified PE can be either leading/forward or
> trailing. It is the P/E derived from expected
> payout ratio, expected return and growth rate.
>
> o Leading= (1-b)/(r-g)
> o Trailing= (1-b) (1+g)/(r-g)
>
> It is different from real P/E which is just
> Price/Earnings. Comparing those two ratios can
> give you indication whether the stock is
> ‘overvalued’ or not.
Elcfa is right. Justified PE is what the PE should be based on “forecasted” fundamentals while what you call the “normal” PE is the current market price divided by the earnings which may be leading (future earnings) or trailing (previous earnings).
If the justified forward PE is higher than “normal” PE, then the stock is undervalued…