TraderGreg, you've got a point. Of course companies have to turn the
corner from loss to profitability, and we might see a relatively high
PE ratio during the transition.
I would sugest though, that a high PE ratio is appropriate in the instance where
expected earnings and growth are likely to continue, and the share price
appreciates in expectation of this. If your hypothetical company manages
to squeeze out a 1 cent profit and that's likely to continue, then it's
50:1 PE ratio makes it a short candidate. If however, as we all believe
CSMA to be an example of, the company is poised to expand operations and
increase its revenues, then a temporary high PE is quite reasonable.
Say (be warned - hypothetically only there) if CSMA comes up with say 10 cents
profit, but expectations are that we will see $3 in the not too distant
future, then a share price of sayyyyyyy..... $20 would be reasonable on
the basis of future expected growth and earnings (and it would probably go
up over $30, if $3 a share was seen, assuming a PE of over 10:1). A PE of
200:1 would temporarily result... until earnings increased, or were not
realized, and then it would correct either up or down accordingly.
I was just trying to make the point that people might misunderstand your
original point on this issue, as I partially did, before you clarified your
earlier post.
Regards,
Durro |
