PE Ratios and Growth Rates?

[ActionDavidK]

How are growth rates determined?

When a growth rate is determined what is it compared to? Market average? Industry average?

Is there anywhere that I can find a list of growth rates?


In A Random Walk Down Wall Street I read that Peter Lynch calculated a stock growth to P/E ratio and would buy stocks with high growth relative to their P/Es.

Is this still a popular technique?

[maxtower]

I think most growth rates are extrapolated from historical growth rates. Its certainly more of a guessing game than a science.

[hlacheen]

It's called the PEG ratio and it's pretty popular. I believe the growth rate used is the analysts' estimated 5-yr growth rate.

[ekabe]

Best way to compare growth rates is to look at the specific industry and compare companies within that. Nowadays it's pretty hard to find anything thats not ridiculously overpriced

[PRE]

Revenue, EBIT, NI, and EPS growth rates are what you want to be focusing on. Ideally, you want each one growing a little faster than the previous (i.e. EBIT growing faster than revenue) since it indicates margin expansion. They should be compared to industry comps, but ideally revenue and NI growth should be 15%. I'm not sure if you'll be able to find a list of growth rates, but you can easily do it yourself by looking at 10-Ks.

P/E ratio is pretty flawed. I would look into the enterprise value multiple instead, as it gives a better picture of the firm's worth. Also, P/CF is a good alternaive since cash is a fact but earnings is an opinion.

[RicoTubbs]

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Also, P/CF is a good alternaive since cash is a fact but earnings is an opinion.

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I don't disagree with the sentiment of what you're saying, but current earnings does a better job predicting future earnings (and cash flow, as well) than current cash flow does. Ultimately, what you're interested in as an investor is the company's future earnings and how/when those earnings will be distributed to shareholders.

The PEG ratio isn't a great ratio for a lot of reasons. I believe The Motley Fool is readable by everyone now, so I'd recommend looking at this post which does an excellent job explaining the significant shortcomings of the ratio:
http://boards.fool.com/Message.asp?mid=14354692

[ActionDavidK]

What is a 10-K, where can I find a list of 10-K stats, and when should I expect to learn about it? Is it covered in any of the books I was recommended?

Those books include:
A Random Walk Down Wall Street
Everyone’s Money Book
The Motley Fool Investment Guide
The Only Investment Guide
One up on Wall Street
Investments - Bodie Kane Marcus

[whyherro]

a 10K is the annual report filed with the SEC - you can go on Edgar online to read through them. A 10Q is the quarterly report.


If you are just getting into investing I wouldn't worry too much about a growth - PE ratio just yet. Read through a couple of 10Ks to see how general financial reporting looks and try to come to an understanding about the items on the balance sheet, cash flows and income statement work and are interrelated.