LIMITATIONS OF MULTIPLES (P/E, P/B)

Limitations of Multiple (P/E, P/B) Investors should be very careful in interpreting past to know the future because the underlying factors of the multiples also get changed over a period. For Example; while using Price to Earning (P/E), it does not cover ongoing risk and also does not include capital requirement of business. P/E does not drive the value rather the value drives P/E. Similarly, Price to Book (P/B) Value can be manipulated and factors such as share repurchase give a major impact on book value, thus making the multiple non-reliable.

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