a few days back I did a story asking are Indian shares expensive – and I said please look at the American markets..they look cheaper.
Similarly I have been a big critic of talking of a MARKET being high or low. You have to keep looking at the components of the market..some are always expensive and some are real cheap.
I have used many measures in the past – cash to price, price dividend ratio, p/e ratio, …etc. There is nothing ‘untouchable’ about these ratios. However if people do not know how to use p/e there is a big hassle. P/e is easy to calculate, and believe me it is very, very difficult to decide how to use it. In the same market 2 accountants can calculate p/e differently – one deciding to use operational profit and the other using net profit. Even using profit before tax and profit after tax can take you to DIFFERENT results.
So just use a different definition for calculating the EARNINGs -and tweak the results to your liking!
Here is a Wall Street Journal (wsj) article telling you why p/e based decisions can be different…
Source:Subramoney.com