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To: hueyone who wrote (45056)	7/31/2001 8:10:35 PM
From: tinkershaw	Read Replies (1) \| Respond to of 54805

I don't believe it is quite so simple a problem to solve. In my opinion, we need a standard way to calculate a PE. Until recently, the "E" in PE was based on earnings determined by generally accepted accounting principles We all have our own preferences for valuation, but one thing I do know from empirical data and from financial fundamentals, is that P/E, no matter how calculated, is really not a relevant measure of valuing a company. It is a helpful rule of thumb, but not not a relevant measure of company valuation. The way to properly value an on-going business is with discounted free cash flow analyis. Or you can do a sum of parts regarding the assets if you break it up, etc. But trailing P/E is not a helpful measure for valuing a company other than as a short-cut rule-of-thumb that provides some measure of whether a company is over or undervalued. So although I agree that I'd like to see a more uniform measure of GAAP accounting (particularly as it comes to how free cash flow is reported - as this really is the most important measure, far more important than the concept of "profits") I think if you look at the cash flow statement and balance sheet along with taking into account growth rates and ROIC you can come up with the most educated guess of what an arm's length purchase of the company would go for using cash as currency. Which is why I guess I get a bit snippy when P/E is continually raised. One, you can use P/E to do anything you want. Second, it really is misleading if you use trailing P/E for growth companies. That large P/E disappears so quickly. Third, it really doesn't tell you anything regarding how much the company is worth. But this is just my MBA degree talking and experience working with investment bankers, launching technology products, and dealing with venture capital. Not to mention my days as an M&A attorney. Although stock analysts will get lazy, and depending on the flavor of the day, use P/E as valuation framework. Again, this is fine, just understand it is only a rule-of-thumb that may be helpful as a benchmark but is really limited in what it really says. Tinker Quick example: At least from a cursory view of Yahoo! MSFT currently has a PEG ratio of 2.11, yet from a somewhat conservative discounted free cash flow analysis MSFT appears to be fairly valued at around $355 billion, its current marketcap. ARMHY on the other hand has a PEG of 1.28 according to Yahoo! (again, I haven't veried the Yahoo figures). Anyway, according to a somewhat more aggressive discounted cash flow analysis, I still find ARMHY to be overvalued by up to 1/2. To be fully valued ARMHY will have to grow revenues by 47% a year for 10 years. Which it could do, but it is a long-time to do so. But the point being MSFT, growing at 12% a year for 10 years (my estimate that MSFT may exceed) is fully and fairly valued at a PEG of 2.1, yet ARMHY, with a much more aggressive revenue growth target in my model, is well over-valued with a PEG of 1.2. Of course the details are in the data, but obviously the PEG and P/E are only a starting point if you want true, financially sound and rational valuations. Companies are not sold and bought on a P/E basis. That is except during an asset bubble when inflated stock can be utilized as currency.