What is “ex-cash” price-to-earnings (P/E) ratio?

I answered this question on Quora: What is P/E Ex Cash?

To calculate the p/e (ex cash), subtract Cash from the market value before dividing by earnings.

So, P/E (ex cash) = (Market Value – Cash and cash equivalents)/Net Income

There is a very good reason why this is done.

Let’s say you are looking at a company A that is trading at $15/share with earnings of $1/share in the last 12 months. The P/E ratio is 15

Also consider another company B that is trading at $15/share with earnings of $1/share in the last 12 months. The P/E ratio is 15 as well.

Company A has $5/share on the books but only needs $2/share to run its business.

Company B has $3/share on its books and only needs $2/share to run its business.

See also: How to compute book value

Which stock is more attractive to you?

If you are still thinking they look similar, think of it from the perspective of someone who is interested in acquiring the entire company.

With Company B, this person can spend $15/share to buy $1/share of earnings and possibly pocket the extra $1 on the company books ($3/share cash – $2/share company needs to run its business)

See also: pb ratio

With Company A, this person can spend $15/share to buy $1/share of earnings and pocket the extra $3 on the company books.

in essence, this acquirer would only spend $15 – $3 = $12 to acquire $1 of earnings for Company A, while for company B he would spend $15 – $1 = $14 to acquire $1 of earnings.

The Company A is actually cheaper.

See also: PEG ratio

Ex- Cash P/E ratio will approximately tell you that company A is cheaper. The regular price to earnings ratio will not give you this detail.

You should also consider these other investor ratios