A lot of people like to say that PE is not robust enough. Ultimately a company is the present value of its future cashflow and how does one simple ratio determine it? We need to have a full model of all it's future cashflow, discount it back to today's earnings, add it up and we have the true value of the firm. How can one simple no. like PE determine the true value of a company?
Well, actually, it kinda does a great job at that.
PE is actually not that different with DCF.
Let's start with DCF. DCF is basically discounted cashflow of a firm:
Discount rate: 6%, Growth: 2%
Yr 0 EPS $1.00 - DCF to Yr 0 = $1
Yr 1 EPS $1.02 - DCF to Yr 0 = $0.96
Yr 2 EPS $1.04 - DCF to Yr 0 = $0.93
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