Valuing A Stock Using Earnback Periods
by Martti Luoma and Reijo Ruuhela
You won’t get an edge on finding good trades using
the same tools everyone uses. Here’s a new look at
finding misvalued stocks.
he price/earnings ratio (P/E) is
undoubtedly the most common
valuation measure of a stock, and
also the most commonly misused.
P/E combines outside information
(price) and inside information
(earnings). Because of the central roles that price
and earnings play, it is not particularly surprising
that the use of P/E is so popular among analysts
It is well known that stocks should have as near
to the same growth rate as possible when they are
compared using P/E, because the valuation of a
stock is not a matter of analyzing only a single
year’s earnings. Unfortunately, it is often
necessary to compare stocks with different growth
rates. As a measure of valuation, however, P/E
neglects different growth rates of earnings.