Investing in Shares & Property

 Powered by Max Banner Ads 

While using the PE model for the action value is simple and intuitive, there are some flaws with it. The most notable of these imperfections is that the value of many Pe a party to an index or a competitor's intellectual property. While this is useful for assessments and the search for relative value, the fact that the index and / or competitor and / or market may be overvalued is never considered.

For example, if a company is assessed resources of a couple of years ago and had resources used PE JSE index as a benchmark … you have not been taken into account that commodity prices were high at all times and trust resource companies has been overestimated.

Thus, through this EP inflated that evaluates the relative share of resources … but not absolutely. Mainly because of this inherent flaw in the model of PE, I strongly with PEG-PE use implicit in the PE model.

To use the theory PEG involve a "natural" ratio PE with these simple steps:

1.) Calculate the (very) long term growth rate of the company. A good company rate should have a long-term growth beyond inflation.
2.) Estimation of the risk premium this growth rate, the more risky business of the highest in the premium should be. Most companies listed on the JSE tend to a risk premium of 20% to 50% on their prospects over the long term rate of growth due to the systematic risk of operating in a developing economy.
3.) Use the following wording (based on the reorganization of the formula PEG) to estimate the "natural" PE ratio:

1 / (rate of growth in the long term x (100% – the risk premium) = PEG implicit PE ratio

As the hypothesis of the risk premium is subjective in the model, suggest that a number of risk premiums is used to get a better idea of fair value the range of action.

The beauty of this approach by presenting an account of PE is that it ignores external bubbles and concentrates almost exclusively on internal factors.

Keith McLachlan is a dedicated small cap investor and writes regularly for http://www.smallcaps.co.za

ShareMagic Overview Part 1