What information does the P/E contain? What does it signify?
There are two ways to construe this question:
- 1.
What causes the P/E signal to take on a particular value? What sets its level? What fundamental aspect of a company’s performance, or its environment, is associated with a high Multiple or a low one? What might cause it to change?
- 2.
What is the P/E signal telling us to do? How can we use it to make decisions?
The first perspective is historical. The second is forward-looking. In general, the first question is of interest to academics; the second is what investors want ...
