NEWSWIRE - November 9, 1998
Topic: Price/Earnings Ratio, Common Stock Valuation
Source: "Resilient Stock Market Sparks Debate on P/Es," by
Greg Ip, Wall Street Journal, Monday, November 9, 1998,
page C1. "Who Can You Trust?" by Sarah Bartlett,
Business Week cover story, October 5, 1998.
Synopsis of Article: The Wall
Street Journal article provides a good discussion of some
of the difficulties of using Price/Earnings ratios to measure
stock market values. With the Dow closing on Friday, November
6, 1998 at 8975.46 (at 4 percent below its record high on
July 17th) there is increased focused on P/E ratios
and market valuation. Current P/E ratios range from 29 to
22 times earnings, depending on how earnings are measured.
The article distinguishes between trailing versus future earnings,
and discusses how analyst's optimism may bias forecasts of
future earnings. The article also discusses reported earnings
versus operating earnings, and presents arguments for and
against using either of these measures. The Business Week
article presents further discussion of the recent trend toward
more aggressive accounting practices by many companies to
manage their earnings, and the increasing acceptance of these
practices by accountants and analysts. Given the recent quote
from SEC Chairman Arthur Levitt, "I fear that we are
witnessing an erosion in the quality of earnings, and therefore,
the quality of financial reporting," the articles offer
a good vehicle for discussing problems with accounting earnings
and their relevance to common stock valuation.
Questions:
1. How do earnings impact common stock value?
2. Which is more relevant to common stock value, trailing earnings
or future earnings?
3. Which are more relevant to common stock value, reported earnings
or operating earnings?
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