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Author: Takahashi101 One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 50  
Subject: What times earnings? Date: 9/2/2007 2:35 AM
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Greetings,

Was wondering if some fellow fool could explain to me the simple concept of understanding " ___times earnings"?

I have been reading the "Little Book on Value Investing" and have learned how to figure out earnings yield. This is done by dividing EPS by the P/E ratio. For example, a company with an EPS of $1 and a P/E of 10 would have a earnings yield of 10% (1/10). Brown (the books author) then states that " a stock selling at 10 times earnings has an earnings yield of 10%". (page 27) So that must make it a cheap stock because a company selling with a P/E of 20 in the above example would have a lower earnings yield of 5%. So is the rule that the higher a company sells to earnings, the cheaper and more value the stock is? Yes or no?


In a few later chapters, He explains how he went searching globally in the mid 1980s for undervalued stocks and found European stocks much cheaper than American ones. He writes "At about the the time that U.S. consumer products companies like Carnation and General Foods were being acquired at 6 to 10 times pretax earnings, we found companies like Distillers Corporation in the United Kingdom selling at 4.5 times after tax earnings." Do earnings go down substantially after taxes? How much do you generally need to factor in?

Can someone please explain this? Sorry for my ignorance!

Thank you,

Takahashi101
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