How can shares in the exact same company at the exact same price have a price/earning ratio (PE) of 19 based on one common accounting treatment but 39 based on another? The answer lies in how an increasingly pervasive accounting issue distorts companies’ income statements and balance sheets.
This issue is what recently caused highly respected fund manager and Fundsmith founder Terry Smith to brand PE ratios “a mockery” when used to compare valuations between different types of company. It's also why one leading accountant has labelled key accounting standards an "absurdity".
Meanwhile, adapting a value investment approach to circumvent the problem explains how a little-known, value-focused ETF provider has been able to consistently outperform the S&P 500 since launch, including during the recent collapse of value indices.