The Value of Growth?

Aug 2017 //
Investing

… if a P/E multiple of 15 is about right to reflect the future expected growth of an average company, a better-than-average company might appropriately sell for a P/E of 20, 25 or even 30. (Since it is hard for any company to sustain very high operational growth indefinitely—due to the highly competitive nature of business in a market economy—it is risky to assume high growth for prolonged periods of time.) Let’s assume that Acme Widget Company’s faster corporate growth justifies a P/E of 25. If that’s the case, then Acme Widget’s stock price would be very pricey at a P/E of 50, despite its faster-than-normal operational growth. Good company, bad stock.