03-24-2006, 03:33 AM
davester Wrote:
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> raz Wrote:
> --------------------------------------------------
> -----
> > P/E of 32 or so at the moment. Back out
> $10/share
> > of cash on hand and the P/E drops to 27.
> It'd be
> > hard for APPL to maintain a 27% growth in
> profits
> > (average estimate for next year is 18%)
> without
> > some new source of revenue.
>
> Call me a stock novice, but the relationship
> between a P/E ratio of 27 and a 27% annual profit
> growth rate is not apparent. What exactly are you
> saying?
>
I'm not sure what level of technical you want, so I'll aim for the middle...
A share of stock can be viewed as many things, but essentially it is a fraction of the company and its earnings. At a PE of 27, it would take APPL 27 years to pay off your investment using your fraction of the earnings - assuming no growth.
If APPL grows revenues at 27%, it will take about 8 years to pay back your investment. Whether you get that payback in cash (dividends) or a bigger company (R&D, acquisitions, ... - hence a higher stock price) or a mix, you reap the benefits.
That comes down to about a 9% return on your investment - or about the average stocks have returned (excluding taxes and inflation it's about 10.3% over the past 80 years).
So, if you're paying more than 27 times earnings, you're betting that APPL will grow revenues more than 27% - or you'd have invested it in some index fund.
-------------------------------------------------------
> raz Wrote:
> --------------------------------------------------
> -----
> > P/E of 32 or so at the moment. Back out
> $10/share
> > of cash on hand and the P/E drops to 27.
> It'd be
> > hard for APPL to maintain a 27% growth in
> profits
> > (average estimate for next year is 18%)
> without
> > some new source of revenue.
>
> Call me a stock novice, but the relationship
> between a P/E ratio of 27 and a 27% annual profit
> growth rate is not apparent. What exactly are you
> saying?
>
I'm not sure what level of technical you want, so I'll aim for the middle...
A share of stock can be viewed as many things, but essentially it is a fraction of the company and its earnings. At a PE of 27, it would take APPL 27 years to pay off your investment using your fraction of the earnings - assuming no growth.
If APPL grows revenues at 27%, it will take about 8 years to pay back your investment. Whether you get that payback in cash (dividends) or a bigger company (R&D, acquisitions, ... - hence a higher stock price) or a mix, you reap the benefits.
That comes down to about a 9% return on your investment - or about the average stocks have returned (excluding taxes and inflation it's about 10.3% over the past 80 years).
So, if you're paying more than 27 times earnings, you're betting that APPL will grow revenues more than 27% - or you'd have invested it in some index fund.