# LOS 37f - Analyze the effects of inflation on asset valuation

The P/E ratio in this LOS is calculated as 1/[real return + (1-flow)(inf %)]. I realize this is the formula they use in the preceding LOS to find tangible P/E, but what does it really mean intuitively? Since when do we find P/E ratio by doing 1/r? Secondly, I am used to seeing a low P/E ratio indicative of a high value stock. However, this LOS says that a higher flow-through rate and a lower inflation rate decrease the denominator and increase the P/E ratio–leading to a HIGHER value of the firm (or cheaper firm). Intuitively, this makes sense (since having a high flow through or a low inflation rate increases your value), but it bothers me that we are now saying that a HIGH P/E ratio is indiciate of a valuable firm. What am I missing here? I am theorizing that perhaps I am mixing up STOCK value (for which low P/E is what we want) and FIRM value (which is what is discussed in this LOS and for which we want a high P/E). I’d apprecaite any help on these two questions as this is really bothering me. Thanks in advance.