MBA 7292 : Solution Essays

 Let’s talk about P/E ratios!  Every public company has a P/E ratio. It is the current market value per share of the company divided by the expected future earnings of that company. Many investors use this ratio as a method of determining the relative value of a stock because it tells that investor how much you are paying for each $ of future earnings. For example, Coca-Cola with a P/E ratio of 20 tells you that you are paying $ 20 a share for every $1 of future earnings; conversely Amazon with a P/E ratio of 115 tells you that you are paying $ 115 a share for every $1 of future earnings.  A P/E ratio can be low or high and it is your job to determine why.  1) a P/E can be low because investors are losing confidence in the company and they are selling shares even though the earnings stay the same  2) or a P/E can be low because earnings are growing quickly and the current market price hasn’t picked up on this earnings growth yet.  3) or a P/E can be high because investors become excited about a company (such as Tesla) and investors will buy the shares now in the hopes that the earnings will eventually increase  4) or a P/E can be high because earnings are actually falling and investors haven’t picked up on this yet – investors are holding out in the hopes that earnings will recover.  Additionally, a P/E ratio should be analyzed in relation to the company’s industry, competition, product line , its debt and its position in the economy.  Thus, I would like you to report on the P/E ration for your two companies. How has the P/E ratio changed (up or down) and why? What is driving the trend in the movement of your P/E ratio? How does the P/E from your two companies compare to other companies in the same industry. There is no one answer here – it is your analysis from what you see in the company.  Can you provide a summary of at least 20 sentences and I hope you enjoy this exercise.