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How to Interpret Company with these PE, PEG and Growth Rate?

QuestionsCategory: Valuation QuadrantHow to Interpret Company with these PE, PEG and Growth Rate?
Khuen asked 7 years ago

Please refer to the following Historical Chart:
 
Year                                 2014       2013       2012       2011
PE                                      16           7            52          n.m.
Net Earning Growth %     -10         1073        118         -130
PEG                                   n.m.       0.007       0.43        n.m.
ROE                                   17          23            2.7         n.m.
 
May I know how would you interpret this result?
– This company have a higher PE of 16 (2014) while the PEG (2014) is Negative and Growth rate is -10. But they have 2 digits growth in ROE. What is this mean?
– This company have higher PE of 16 (2014) while Net Earning Growth dropped to -10 (2014). My understanding is if one’s PE increased, and PEG become tooooo… undervalued; in this case its have negative value, means it has negative growth. But, they recorded ROE of 17%.
– Let’s Look 2013, it shows that Growth rate shot up to 1073%!!! but PE become cheaper and PEG dropped to 0.007. What is this mean?
 
Thank you.

Rusmin Ang Staff replied 7 years ago

Hi Khuen, which company is that? Without the context, ie understanding the nature of the biz, it would be difficult for me to interpret it.

Khuen replied 7 years ago

Hi Rusmin,In the Valuation Quadrant, we learn about all these Ratios. If we only looking at the Ratio, without Fundamental study, can you interpret these values? Can these values reveal if it is a Company we should spend more time to understand their Fundamental?Anyway, this company is “Redtone” in Malaysia Bursa.Thank you.

Rusmin Ang Staff replied 7 years ago

Yes, you could make ‘quick’ interpretation by assessing its valuation except you have to do it with care. A PE ratio, say 5 times multiple, may look cheap at start may misled you if there is one time gain in exceptional items (or inclusion of fair value gains in some real estate companies). My suggestion is once you found a company that is trading cheaply, it is still important to assess the remaining quadrants thoroughly; business, management and financials.

6 Answers
Rusmin Ang Staff answered 7 years ago

I hope that answer your questions, Khuen.
After sometime, I am sure you will be fluent on the application of these valuation metrics. Just keep on practising them :)

Khuen replied 7 years ago

Hi Rusmin,I am afraid you haven’t answered my question yet. Refer to the chart above, how to explain and interpret the abnormal value of PE with PEG and PE with ROE? Please refer to the 3 bullet points above. In the Valuation Quadrant course, it explains the usage of each ratio. For example, for PEG, we should aim for < 0.5. However, in real case scenario, such as Redtone, it is not as simple as we think. Let's look at my questions above, the PEG is in negative value, and PE increases while Growth rate become negative value, why? What's the meaning. It is clearly not as simple as merely looking at single ratio. I suggest to provide more real case studies in Valuation assessment. Thank you.

Rusmin Ang Staff answered 7 years ago

Hi Khuen,    
 
Referring to the chart you have provided, RedTone reported inconsistent earnings (2012-2014) and losses (2011). So if you attempt to estimate its CAGR, P/E and PEG, you could barely interpret it meaningfully.    The usage of the P/E ratio is only useful for companies with consistent earnings. RedTone in this case doesn’t fit the bill at all.  To maximise the Investment Quadrant’s stringent criteria, we strongly advocate picking companies with highly predictable and consistent earnings.  The question is whether the earnings for RedTone is going to be consistent and sustainable down the road? If you think so, then you could use the latest P/E (2014) as your guidance to determine whether it is a bargain stock. But it’s a big question mark.     
 
For PEG, this metric can only be used for fast-growing companies with consistent growth in earnings/cash flow. RedTone’s earnings’ CAGR can’t be rightfully estimated as the company’s earnings are so volatile. If you remember, in the Investment Quadrant, we place emphasis on picking a company with a credible and sustainable track record (with consistent revenue, earnings and cash flow) of at least three to five years. Anything that doesn’t fulfil this yardstick will be eliminated using the 30-Second Filter. It is better to be safe than sorry. And lastly, Return on Equity (2013 & 2014) shows double-digit figures. It could mean the management is starting to turn around the business; you’ll have to wait and see.
 
Thanks Khuen! We will definitely take in your suggestions to include more case studies for the next updates. Oh yes… we have included three new case studies recently (see the updates here).
 
Let us know if you have any others questions, we will be happy to assist you :)    

Isabel Im answered 3 years ago

Hi Victor/Rusmin,
I have a question on PE/PEG as well but on comparison with peer/industry numbers.
I’ve read a research report that JMH PEG is 13.6x while the peers are 0.7x.  What does this mean? The figures look really far and wide!
On the other hand, JMH’s PE of 9.4x and PB of 0.9x are considered ‘good value’ amongst similar companies….
 

Isabel Im answered 3 years ago

Hi Victor/Rusmin,
I have a question on PE/PEG as well but on comparison with peer/industry numbers.
I’ve read a research report that JMH PEG is 13.6x while the peers are 0.7x.  What does this mean? The figures look really far and wide!
On the other hand, JMH’s PE of 9.4x and PB of 0.9x are considered ‘good value’ amongst similar companies….
 

Isabel Im answered 3 years ago

Hi Victor/Rusmin,
I have a question on PE/PEG as well but on comparison with peer/industry numbers.
I’ve read a research report that JMH PEG is 13.6x while the peers are 0.7x.  What does this mean? The figures look really far and wide!
On the other hand, JMH’s PE of 9.4x and PB of 0.9x are considered ‘good value’ amongst similar companies….
 

Victor Chng Staff answered 3 years ago

Hi Isabel,
 
To interpret PEG is that the lower figure is better. The company may have high PE but if the growth is high, the company may seem cheap as compared to company with low PE and growth.