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Author: njbagelusa One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 2201  
Subject: Re: What does a high P/E means? Date: 3/5/2000 4:19 PM
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saunya wrote:
I am interested in buying VodaFone Air, but it has a P/E of 226.92. Is that something to be alarmed about? What does that high P/E mean?


Hi saunya,

Interesting that you ask this question. A very similar question was asked in the recent Fool School email (02 Feb 2000) Investing Basics Weekly. Here's what they said:

Published P/E ratios generally represent a stock's current price divided by its last four quarters of earnings. This means that they reflect past performance, when intelligent investors should really be focusing on future prospects. (You can calculate forward-looking P/E ratio's by dividing the current stock price by next year's expected earnings.)

In pre-digital days, low P/E's often signaled a temporarily mispriced stock, but computers have made the market more efficient. Despite this, you can still find some promising low P/E stocks that for some reason the market has simply overlooked. Just don't let the P/E ratio be your only tool; crunch some other numbers, such as the earnings growth rate. For example, a company with a P/E of 40 that will grow earnings by 80 percent next year is most likely a better value than a company with a P/E of 20 growing earnings 4 percent annually.

As for VodaFone Air, the P/E does seem high. You may want to compare it to the average P/E ratio for the industry and look at a comparison with its competition. As suggested above, take a look at the earnings growth rate for this company as well.

Finally, I recommend that you perform a thorough analysis on VodaPhone prior to making a buy. Start with an analysis of this company against the rule breaker criteria.

If you want to learn more about valuing VodaFone, be sure to read the 13 Steps to Investing Foolishly. Pay particular attention to Step 10: Understand Rule Maker Investing. This is the link:

http://www.fool.com/school/13steps/stepten.htm

This is a direct link to the rule maker criteria. You will find a downloadable spreadsheet that will make it much easier to perform the calculations:

http://www.fool.com/portfolios/rulemaker/rulemakerstep6.htm

Hope this was helpful. Definitely crunch the numbers before buying blindly. You owe it to yourself.

njbagelusa

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