Even the most common price to earnings ratio is not as simple as you think.
There is an understandable tendency to put the different valuation methodologies into different baskets; each method does have its pros and cons. But at the end of the day, investors should remember that each method is just a different lens of looking at a company. There is only one intrinsic value. Theoretically, each method should arrive at the same value. At the very least, a proper calculation of intrinsic value should be agreeable across all methods of valuation. In other words, common sense should prevail at the end of the day.
To illustrate my point, let’s think a little deeper about the common price to earnings ratio.
A perpetual bond example
Consider a bond that pays 10% coupon in perpetuity – this means that it provides a 10% return on capital – what is the ...
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