IFB157: Price Ratios and Old Investing Books – Still Relevant

Announcer (00:00):

You’re tuned in to the Investing for Beginners podcast. Finally, step by step premium investment guidance for beginners led by Andrew Sather and Dave Ahern. To decode industry jargon, silence crippling confusion, and help you overcome emotions by looking at the numbers, your path to financial freedom starts now.

Dave (00:36):

All right, folks, we’ll welcome to Investing for Beginners podcast. This is episode 157 tonight, We’re going to return to the well, and we’re going to answer something, Listener questions. We’ve got some more great ones, and we thought we would take some time and answer those for you guys on the air. So without any further ado, I’m going to go ahead and read the first question.

Dave (00:54):

So I have to whom it may concern. I am currently beginning to understand slash calculate ratios recommended by Andrew, such as P E P S and PB I E price to earnings price, to sales and price to book where I am caught up is about the idea that one of these right ratios might carry more importance than another. For example, the canopy, the company canopy growth company, a CGC has a current PE of zero and a PS of 18, assuming most likely due to new slash growing company. I know that these are not normal numbers. For example, JP Morgan or JPM has a PE of 11.16, a PS of 2.06, and a price to book of 1.05 that indicates a discount price and a great buyer returning to CGC. Their price to book ratio is currently 1.76 again, indicating a sort of sale. I know this is not a great example of the normal PE and PS ratios. However, I found it a great example of prioritizing with ratios matter. Please let me know if there is any analysis slash information you can provide into weight given to these ratios and which one might take priority, and how are these affected by new companies? Thank you, Ethan. Andrew, what are your thoughts on Ethan’s question?

Andrew (02:13):

Yeah, it’s a very good one. So the whole point of these price ratios is to try and get some context on the numbers. So there’s not some magical Excel file anywhere out there that says, you know, if your PE is a 12 and not a 13, then you’re going to be golden. The stock market isn’t that it’s not some game with boundaries where you can just put in ingredients and get the magical result. So where these price ratios come into play is it tells me when a stock is very, very expensive compared to a lot of other different stocks. And so, you know, even you talk about here, how you say that this isn’t a great example. I think it’s maybe the perfect example to illustrate where price ratios can be very helpful because, as you said, the company has a PE of zero and the price to sales of 18.

Andrew (03:18):