Question

# Two companies are selling at P/E ratios of 20x forward estimates. One is growing EPS at...

1. Two companies are selling at P/E ratios of 20x forward estimates. One is growing EPS at 24%, the other at 20%. How would you decide which company is more attractive?

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Answer #1

P/E ratio of both companies is 20x.

But the EPS of one is 24% and other is 20%.

Since the P/E ratio of both is same, selection should be made on the basis of EPS and Price.

1.EPS of 1st company is growing more i.e. this company is increasing its earning more for its shareholders in comparision to the other company.

2. Price=EPS * P/E

So the Price of 1st company is greater then the other company. (20*24%>20*20%)

And price symbolises what the market is willing to pay for the stock. So if the market is willing to pay more for the 1st company means the given first company is more attractive.

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