Debt Levels impact P/E Valuations
January 12, 2011
– Comments (3) |
RELATED TICKERS: NIVS
, DPS
My Hypothesis is that Debt Levels exceeding Cash usually result in ridiculously cheap P/E, as compared to the historic P/E that company carries when Cash exceeds Debt..... Or against Industry Peer's P/E.
That's my hypothesis and I am being labeled as spouting off pure nonsense..... Really?
" Varchild - I do not care what ScottTrade says about NIVS or any other stock. I'm saying that your statement: "Whenever Debt Exceeds Cash, the P/E is ridiculously low." is not true. "
Well, one would have to go through 1,000 stocks at random and check their Debt to Cash ratios and their P/E against Peer/Industry P/Es to prove or disprove this.
Labeling my statement as pure nonsense is completely wrong.
(F) Ford Motor Company and (NIV) carry ridiculously cheap P/E ratios while their Debt exceeds cash levels.
And it does make sense as a Debt level that exceeds Cash usually signals the business is struggling in some way... Either spending too much money on administrative expenses, or other expenditures (hurting their profit/gross margins), or their sales took a dive.
(DPS) Dr. Pepper Snapple Group is also another excellent example proving my point.
When that Stock debuted on the stock market it carried a share price of around $25.50. Today it is around $36 per share.
As the company's sales helped lower the company's debt, the P/E multiple increased dramatically for Dr. Pepper Snapple Group.
Investors panicked on (DPS) in the beginning punishing the stock to March 2009 low price of less than $12.00 on intraday basis.
How in the heck is DEBT not a factor to how Wall Street Investors view a Stock's P/E multiple valuation? The big money players are the ones that can Walk a stock up... They are the ones that can push a stock to a higher P/E. They are also the ones that tend to abandon/avoid a stock that has too much debt.
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