Novice Investing - Using P/E ratio on Novell

Date: Monday 01st 2008f December 2008 05:17:32 PM

Using P/E ratio on Novell - 10/18/2005

By: Novice Investing Staff

We have covered on the common misuse of Price Earning ratio earlier on the week. Today, we will apply some of these principles for Novell Inc. (NOVL). At a glance, NOVL looks cheap. It trades at trailing P/E of 7.75. Its earning per share was $ 0.92 while the stock is traded at $ 7.16.

Is NOVL really cheap? Calculating its forward P/E tells different story. NOVL is expected to earn $ 0.09 per share this year. This puts its forward P/E at a high 79.5. Is NOVL that expensive now then? Hang on a second. We should not neglect Novell's balance sheet when considering P/E ratio. As of July 31st 2005, NOVL has $ 1.6 Billion of cash & short term investment while acquiring $ 600 Million in long term debt. Therefore, NOVL has a positive net cash of $ 1 Billion or $ 2.62 per share. The real price of NOVL's business is close to $ 4.54 now rather than the current stock price of $ 7.16. Forward P/E for NOVL is therefore 50.4. While it is still high, it is not as high as when we neglect the balance sheet.

The analysis will go on and on. In short, P/E ratio cannot be used by itself to judge the value of any investment. Our goal as investors is to analyze all things.

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Novell Inc. (NOVL) or any other securities.

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