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Saturday, June 30, 2007

Inflated Earnings

In good economic times (as like now), corporate earnings are inflated by the increase in asset prices.

As companies report higher earnings, their share price goes up and the price earning multiples goes up as well. More people buy into the shares.

When the bubble bursts, asset prices drop. Corporate earnings drop as well. In bad times, corporate earnings can drop by more than 50%. You can expect the share prices and price earning multiples to collapse.

Be careful about investing in properties and shares in times of inflated asset prices. It can be risky. Some people consider the current markets to be "frothy".

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