| Investing in low P/E companies?

Investing in low P/E companies?

raucous raphael asked the question:


There is a company with an EPS of Rs.13 per share, (discounted EPS of 8.9) and current share price of Rs.46, which gives it a PE of 3.9, which is extremely low considering the existing PEs of other Financial Services companies. However, the company has not paid any dividends till date, and am not sure whether any will be paid this year too.

How advisable is investing in such a company, considering only the low PE, and the future prospects of the firm, which look to be extremely good? In the absence of any dividend payouts, how would the rewards flow?

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Comments

2 Responses to “Investing in low P/E companies?”

  1. SWH on March 25th, 2009 1:19 pm

    Investing in companies based only on low PE is not a sound investment process. PE in conjunction with earnings growth or PEG is a better parameter. PEGs less than one are good stocks. Once the stock is trading at more than twice its growth rate — that means it has a PEG (price/earnings to growth ratio) greater than 2 — you ought to get out.
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