P/E ratio Vs Loss in Other Comprehensive Income

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Chirantana

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Hi Everyone,
Please help me to understand how significant losses accounted for as OCI is the reason of lower P/E Ratio?
Thanks
 
Companies A and B are essentially identical.
Company A’s stock sells at $100/share. Their net income, which includes substantial losses, is $4/share. Their P/E ratio is 25 (= $100/share Company A’s stock sells at $100/share. Their net income, which includes substantial losses, is $4/share. Their P/E ratio is 25 (= $100/share ÷ $4/share).
Company B’s stock sells at $100/share. Their net income, which includes no substantial losses (they’re all included in OCI), is $5/share. Their P/E ratio is 20 (= $100/share ÷ $5/share).
 
Hello Magician,
I agree with your point.
I came across this in Session -8,Reading -25,Page -200 Ex-21 in CFA Curriculum
The Question brief as follow
Company A - Price =35, EPS=1.60, P/E ratio 21.9 , OCI =(16.272) million , Shares= 22.6 million
For Company B in same order as above - 30, 0.90,33.3, (1.757) ,25.1
Analyst has to explore why A’s PE is lesser than B inspite of they are comparable?
Conculsion that has been suggested is A is undervalued, Thus Analyst look beyond NET INCOME ie he Considered P/OCI ratio that comes very near for both company A and B 39.8 and 36.1 respectively.
I am not able to buy the concept taught in this example.
Thanks & Regards
 
It doesn’t really make much sense, especially in the practical world.
However, the concept of relative valuation in this example remains valid. Given the financial metrics for each company, you’d be forced to compare them on that standard and find out which company might be the better investment (or cheaper). Since their PE ratios are different, the one with the lower PE ratio would be the cheaper company to buy, but given that they are truly comparable. But based on the question, you only have OCI for cross cheking comparability. And since they are pretty close, then company A is undervalued dollar for dollar (or company B is overvalued).
 
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