P/E = 1 / ROR + [(1-inflation flow rate) x (inflation rate)] ok from the notes: increase in inflation flow rate or decreases in rate of inflation causes an increase in the value of the firm. so from this we conclude that a HIGHER P/E means a higher firm value??? I always thought that low P/E corresponds to a high firm value… what do you think?
In this case, they talk about the firm passing along the increase in inflation to customers. The more they can do that successfully (higher flow-thru rate), the greater the firm value. I think the higher the P/E, generally, the more valuable. When you’re doing relative valuation, I think that’s when you’re looking for the lower…I’m still kinda confused on this. Also, isn’t the ideal P/E range between something like 16-25…but I suppose it varies by industry. Did I just pull all of that shite outta my arse? Sorry, I’m at work and NOTHING is going my way (was here til 2am last night) and I just hit another road block.
I think they are just saying that an investor will be willing to pay a higher multiple if the firm can pass all inflation costs on.
take it easy zimzim… and enjoy whteva u doing! : )