Good article, and I agree with the main points. However, you have to be very careful comparing PE ratios between companies with different capital structures, it is wrong. For example, lets take two companies that are exactly the same, A and B and lets say they should have an enterprise value of $100 and have the same earnings before interest.
Company A is all equity and has a PE of 10 ($100/$10). Lets say company B is half equity value and half debt ($50 and $50). Lets also say the company is paying 4% on its debt. Its earnings are lowered to $8, however the PE ratio is actually 6.25 ($50/$8).
This company isn't "cheaper" it just has a different capital structure. No measure is perfect, but at least use EBITDA or Unlevered FCF for comparisons. This is especially important now with the large number os stock buybacks.
static analysis is always problematic. If a company B is using debt, it should be able to increase its earnings with the debt and increase equity value. if it's failing to do so, it should be cheaper because it is riskier
Company A is all equity and has a PE of 10 ($100/$10). Lets say company B is half equity value and half debt ($50 and $50). Lets also say the company is paying 4% on its debt. Its earnings are lowered to $8, however the PE ratio is actually 6.25 ($50/$8).
This company isn't "cheaper" it just has a different capital structure. No measure is perfect, but at least use EBITDA or Unlevered FCF for comparisons. This is especially important now with the large number os stock buybacks.