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Homework answers / question archive / There are various limitations to employing the PE Ratio for company to company comparisons
There are various limitations to employing the PE Ratio for company to company comparisons. Describe several of the limitations. A better measure would be to employ the PEG Ratio, how would you calculate?
The Price/Earnings ratio is the most common multiple used to estimate the value of common stock.The advantages and limitations of using P/E ratio are,
Advantages
The Disadvantages of using P/E ratios are,
In general, a company with a higher growth rate will have higher P/E ratio. It makes those big companies over valued as compared to other companies. The PEG ratio is considered to be a convenient measure. The PEG ratio is calculated by,
PEG Ratio= (Price/Earnings)/ Annual EPS growth.