Could anyone of you tell me what is the effect of inflation on intrinsic PE ratio? I remember reading some formula regarding this but can’t recall now. TIA!
inflation erodes the value of earnings of a company so if the company is not able to pass through the full effect of inflation to its customers the PE will be reduced. companies that pass through more of their inflation have a higher PE than those that can not pass through their inflation. it may not be a choose as such but there are some companoes that whose demand is ver elestic any any price increase will not be accepted by customers they will find substutes so such companies can not pass on much of the inflation effect.
P/E formula with inflation (is this what you are referring to?) 1 / real required rate of return + (1-inflation flow through)(inflation rate) it’s pretty important stuff
Thanks. I think this was the formula.