I would also add that the PE ratio does not take into account accounting subtleties such as depreciation and amortization (which reduce profits but not necessarily cash generated) and does not make any adjustments to CAPEX between maintenance and growth.
Thanks to Rene Sellmann for highlighting the limitations of PE ratios.
Regarding your point on 'Reinvestment Rate, Reinvestment Runway & ROIIC', I find it intuitive to think of it in terms of capital intensity. Earnings from businesses that must reinvest heavily just to grow 10% (e.g. industrials) are worth less than those that can reach the same growth with modest reinvestment (e.g. software).
Coincidentally, I recently published a post about why lower P/E is not always better. Our posts covered very similar points.
I would also add that the PE ratio does not take into account accounting subtleties such as depreciation and amortization (which reduce profits but not necessarily cash generated) and does not make any adjustments to CAPEX between maintenance and growth.
Thanks Tristan. Spot on! We also covered this in the Topicus segment.
Thanks to Rene Sellmann for highlighting the limitations of PE ratios.
Regarding your point on 'Reinvestment Rate, Reinvestment Runway & ROIIC', I find it intuitive to think of it in terms of capital intensity. Earnings from businesses that must reinvest heavily just to grow 10% (e.g. industrials) are worth less than those that can reach the same growth with modest reinvestment (e.g. software).
Coincidentally, I recently published a post about why lower P/E is not always better. Our posts covered very similar points.
I also told the story of First Natural Foods Holdings, which was selling for only 1x PE in 2006. It turned out to be a fraud. I discussed ways investors can spot the red flags: https://angsanaanderson.substack.com/p/the-lower-the-pe-the-better-really?r=5rl2u5
Thanks for sharing!