Investment Insights
October 31 2023

The P/E Ratio: A User’s Manual

30 min read

Steven Bleiberg, Managing Director, Portfolio Manager, TD Epoch; William Priest, CFA, Executive Chairman, Co-Chief Investment Officer and Portfolio Manager, TD Epoch

Does a stock's price and its P/E ratio tell you how much a company is worth? Conventional wisdom says yes, but we think otherwise. This paper explores the theory behind the discounted cash flow (DCF) valuation model and the underappreciated role played by ROIC. In addition, we see how the DCF model can be used to deconstruct P/E ratios in the real world.