Find out the current returns of a payday loan
The next step in establishing the appropriate P/E ratio for your business is to find out the current returns of various alternative investments and to list them in order of type and risk. This will give you a point of reference to help you make your selection. Below we list some types of investment and their P/E ratios to which you could refer, and we then ask you to consider some other issues that could establish an appropriate P/E.
Relatively risk-free investments Consider, for example, an interestbearing cash deposit in a high street bank. Let us assume this pays 6% before tax, or 4.5% after tax. A 4.5% after tax return is equivalent to a P/E ratio of 100 -f 4.5, or 22. (Note this investment has neither capital gain nor the risk of loss, whereas most businesses do.)
Sale prices for comparable private businesses Ask a company broker with knowledge of your industry sector what P/E ratios are currently being applied to business of your type and size and, for sake of interest, in some other sectors of the market. (I expect the answer to be somewhere between 4 and 8.) 3 London Stock Exchange Find out what P/E ratios are applicable for public companies in your industry sector on the LSE. The Financial Times publishes average P/E ratios for the LSE for a range of sectors.