Wednesday, May 27, 2015

Adjusting PE ratios for cash.

Aswath Damodaran uses his extensive database to do, in practice, what I attempted to do, here, in theory:  adjust PE ratios for cash balances.



Here is the key graph, regarding the application of this issue to current valuations.  PE ratios on actual, productive assets are much lower than they appear.



I would take this a step further.  Corporations also have much lower debt levels, and a similar adjustment should also be made regarding debt.  Damodaran addresses this indirectly in his recommendation to use Enterprise Value instead of equity valuations.



Relative PE ratios are much lower than they seem and Equity Premiums are much higher than they seem, when they are adjusted for cash and leverage.  This is especially interesting, given that even unadjusted Equity Premiums have been very high.

1 comment:

  1. This is especially interesting, given that even unadjusted Equity Premiums have been very high. Download PDF

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