Ask Colin

Many companies do not have P/E ratios. Why is this?

The PE ratio is the earnings per share for the company divided by the price. It tells you how many years it would take for earnings t repay your investment. It is therefore a measure of how expensive the company is in relative terms. So, if a company has a PE ratio of 10 times, it means that you are paying ten times the earnings to buy its shares. If another company has a PE ratio of 20 times, it means you are paying twenty times the earnings to buy its shares. Clearly the second one is more expensive and the first one is better value.

 

If a company does not have a PE ratio, there are two probable reasons. One is that it does not make a profit. If it has no earnings, it has no PE ratio. The other reason is that maybe it is a more recently listed company and it has not yet released its results for its first year on the market.

 

In general terms, companies that have no earnings and hence no PE ratios are unproven and are more in the nature of a speculation than an investment.

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