@article {Estepjpm.2019.1.093, author = {Preston W. Estep}, title = {The Price/Earnings Ratio, Growth, and Interest Rates: The Smartest BET}, elocation-id = {jpm.2019.1.093}, year = {2019}, doi = {10.3905/jpm.2019.1.093}, publisher = {Institutional Investor Journals Umbrella}, abstract = {The price/earnings ratio (PE) is the most ubiquitous measure of investment value. It appears to tell us how many years would be required for accumulated earnings to equal today{\textquoteright}s price (the break-even time [BET]), but that interpretation is built on unrealistic assumptions about a company{\textquoteright}s future: Earnings do not grow, or if they do grow, they are discounted at a rate equal to their growth. This article shows a simple formula that yields a correct computation of BET. A correct BET remedies the failings of PE, allowing valuation comparisons of stocks with widely different growth rates and PEs. Moreover, it provides useful information about the sensitivity of today{\textquoteright}s price to changes in interest rates or growth rates. BET is shown to be superior not only to simple PE but also to the ratio of PE to growth rate.TOPICS: Performance measurement, accounting and ratio analysis, portfolio management/multi-asset allocation}, issn = {0095-4918}, URL = {https://jpm.pm-research.com/content/early/2019/08/27/jpm.2019.1.093}, eprint = {https://jpm.pm-research.com/content/early/2019/08/27/jpm.2019.1.093.full.pdf}, journal = {The Journal of Portfolio Management} }