Along these lines, an applicable article from Peter Leeds posted a little while back.......indicating that in a growing sales situation with cutting edge technology, the p/e ratio could go as high as 80......meaning each additional KDS sale after 1/quarter would be worth another 28 cents/share to investors.
That said, I prefer to stay conservative with 20, for now.
Blog : P/E Ratio Helps Find Stocks to Buy by Peter Leeds on July 23rd, 2012
I was asked a great question about P/E ratios on our Facebook page, and I realized that it may help if I gave a quick refresher, and specifically explained how they apply to knowing which penny stocks to buy.
The P/E ratio is simply the price (P) of a stock, divided by the earnings (E). If a stock made $2 in earnings, but is trading at $20 per share, that's a P/E of 10.
Thus, lower numbers are better. A P/E of 12 is stronger (and potentially a better buy) than a P/E of 23.
The beauty of financial ratios like P/E is that it levels the playing field. You can compare IBM to Apple to Exxon Mobile to any obscure penny stocks to buy, and see which is producing more earnings for less. If the penny stocks you want to buy have P/E's of 14, 18, and 78, and Google has a P/E of 43, then you know that two of the three penny stocks you want to possibly buy are actually producing greater earnings from their shares than the 500 pound search engine giant.
When it comes to penny stocks to buy, however, most aren't making any earnings at all. Technically, you can't have a negative P/E. If there aren't earnings, then you won't be able to get a true P/E ratio. Thus, when it comes to penny stocks to buy, P/E is not always the best ratio to use to make buy and sell decisions.
However, if you can generate a P/E when analysing which penny stocks to buy, then certainly use it.
P/E's are different for different sectors and industries. If you are deciding to buy penny stocks from mature industries like forestry, rendering plants, crops, oil and precious metals production, utilities, or homebuilding (just as a few examples), then you should expect strong P/E ratios of between 8 and 20 (possibly).
Rapidly growing penny stocks like those in internet, start-up businesses, and cutting edge technology, often command higher P/E ratios, sometimes as great as 40 or 80.
The best way to analyze penny stocks that you may want to buy with P/E (or any financial ratios) is to compare them directly to their competitors and other stocks in the same sector or industry. Let's say you are deciding whether or not to buy penny stocks from the retail sector. Take a look at the P/E's of their competitors and other stocks you want to buy in the same sector. Compare even the big companies. Financial ratios let you gauge a $4 million company head to head against a $500 billion stock.
When you analyze which penny stocks you may want to buy, always try to use P/E, even just to get an idea of the valuation (are the shares of these penny stocks expensive or cheap to buy?)
One warning. P/E's are stronger the lower they are. However, if they are too low it becomes more of a warning sign. A P/E of 5 or less (especially when the other penny stocks in that sector have P/E's of much higher levels) usually means there is something wrong with the company.
For example, picture gold mining penny stocks with a P/E of 2. Why are investors letting these shares fall to such a valuation? Perhaps they have a massive lawsuit against them. Perhaps they only have 1 year left in their mine life, after which they run out of resources.
There were also a lot of very low P/E ratios with China-based penny stocks lately. This was because no one wanted to buy penny stocks that were very often lying on their financial reports. When nobody will buy penny stocks such that their P/E drops to 4 or 1 or 2.5, then maybe you should also not buy. There are plenty of penny stocks to buy - you don't need to jump into penny stocks that have such a ridiculous valuation.
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