Should Investors Stop Relying So Much on P/E Ratio?

The price/earnings ratio (Р/Е) is one of the most commonly used indicators by Bulgarian investors. This indicator alone is insufficient to evaluate a stock and using it as the only criterion is misleading, to put it mildly.

The price of the stocks on the Bulgarian Stock Exchange (BSE) retreated to their levels of more than 2 years ago after a nine-month slump.

The average Р/Е ratio of the SOFIX stands at 15 at present, but it is still one of the highest in the region. Negative factors, such as high energy costs and the weak dollar, may also affect the results of the companies, until they adapt to the market conditions and that is only the best case scenario.

At the same time the the stock prices of some companies, which do not have a low P/E ratio, remain quite attractive in terms of other indicators.

We should not forget that Bulgaria is a fast-developing market and the companies often make large scale investments in their expansion, which will have a positive effect on their future earnings.

This holds value for the financial sector as well, where the competition for market share is extremely stiff and expansion costs reduce profitability, but the winners will enjoy their success in the future.

Some of the companies own assets, such as properties throughout the country, whose value exceeds by far their market capitalization.

Using the Р/Е ratio for the evaluation of the stock of a holding company is also misleading. Often one of the different businesses of the company may cost more than the entire market capitalization of the holding company.

The turmoil on the global financial markets and the forthcoming slowdown of the global economy are regarded by people, such as Worren Buffett, as a suitable time for the acquisition of companies at good prices.

The large-scale private capital, however, is still missing in Bulgaria. Often a commercial complex in Sofia costs more than a large-scale holding company listed on BSE, but the interest in real estate is still stronger than the acquisition of companies at this points.