100 is a good number.
It means perfect in many contexts.
In finance, 100 could mean a lot of things, especially in financial
ratio analysis. Price to Earnings (PE)
ratio is a very popular ratio in investment world. As its name implies, PE means stock price
over earnings. Mathematically written
as:
According to CEIC data (Read more here), PE ratio for KLCI in the past ten years were in the range of 13 – 23, never hit 100.
Now let’s look at Facebook Inc (FB). Currently FB is trading around 20 – 30 PE. Nevertheless, according to the data from TradingView.com, FB were trading around 100 PE during 2016. Since then, FB stock price soared more than 100% to over $200 per share in 4 years! 100 PE is great right?
Ok, let’s do more analysis before we jump the gun. In FY2015, the earnings per share (EPS) of FB
was $1.31. The next year, 2016, its EPS
was $3.55, more than 100% increase (see 100 again yeah), and it continued to
grow rapidly to $7.65 by end of 2018.
During this period, its PE continued to slide from 100 to 25 as a result
of growing EPS.
So, what does 100 PE mean?
The investors are expecting the earnings might double or triple in the near term when they keep buying the stocks and pushing the price up. Once they think the company could no longer grow at such a rapid rate, the PE will come down, revert to market average.
The essential questions that you need to ask when buying a stock at 100 PE are:
1.
Can the company double or triple the earnings in
the near term?
2.
Does the company operate in an exclusive market
where no other competitor can enter the market easily?
3.
Is the company selling a product that no other
competitor can easily produce?
4.
Is the demand of the product will double or
triple in the near term?
If you answer “Yes” for all the above questions, then 100 PE
is a good indicator to buy the stock!
Disclaimer:
The above analysis does not imply any buy or sell recommendation. The
author disclaims all liabilities arising from any use of the information
contained in this article.
Disclosure: The author may
have interest in the stocks of the companies in this article.
