Reason for low P/E ratio for growth companies and low P/B ratio for financial companies

Schweser Notes p312 -

Low P/E ratios will likely exclude growth companies from the sample.

I thought growth companies will have increasing earnings with low price, hence giving low P/E? In other words why do growth companies have high P/E ratios?

Low Price-to-book or high dividend screen will likely include an inordinate proportion of financial services companies.

Can anyone explain to me why financial services companies will likely to have low Price-to-book ratio?

Many thanks in advance! :slight_smile:

For a growth company, the price, presumably, incorporates the expected growth: higher price versus lower current earnings means high P/E ratio.

I’ll have to ponder the one about financial services companies.

A lot of financial service companies’ assets are marked-to-market. That tends to make B much bigger for them.

Also, if we think about the asset a normal company’s carries, for example PPE, PPE is really just leveraged to create another asset (sales) that is much greater in value than the historical cost of the PPE. An equity buyer isn’t buying looking to buy the firm for its value of PPE but really at some multiple of the expected utility from PPE, which usually tends to be pretty good margin on its depreciated cost.

Thank you all for the replies.

Do you mean for normal firms (for example manufacturing firms) have PPE in their book value, as this value depreciates as time goes by, thus making its book value decreases which results in high P/E ratio compared with financial firms with no or negligible PPE?

This is what i’m thinking (keeping it simple), a bank has intangible assets on their books that produce a fairly steady stream of interest income over time. Their assets are marked-to-market often, which will make the banks assets equal to their fair value. Why would an investor pay a premium, price/book > 1 for the financial assets they could go out and buy for themselves?

A manufacturing firm will leverage its real assets to produce sales. An investor is willing to pay a premium Price/book > 1 because the company produces a product that generates revenue an investor can’t easily replicate.

At least that’s how i’ve looked at it in the past :wink: