It has been decided that Government would disinvest up to 20 per cent of its equity in selected public sector undertakings, in favour of mutual funds and financial or investment institutions in the public sector. The disinvestment, which would broad base the equity, improve management and enhance the availability of resources for these enterprises, is also expected to yield Rs. 2,500 crores to the exchequer in1991-92.

The modalities and details of implementing this decision, which are being worked out, would be announced separately. The policy, as enunciated by the Government, under the Prime Minister Shri Chandrashekhar was to divest up to 20% of the Government equity in selected PSEs in favour of public sector institutional investors. The objective of the policy was stated to be to broad-base equity, improve management, and enhance availability of resources for these PSEs and yield resources for the exchequer.

Problems Associated with Disinvestment:

A number of problems and issues have bedeviled the disinvestment process. The number of bidders for equity has been small not only in the case of financially weak PSUs, but also in that of better-performing PSUs. Besides, the government has often compelled financial institutions, UTI and other mutual funds to purchase the equity which was being unloaded through disinvestment. These organizations have not been very enthusiastic in listing and trading of shares purchased by them as it would reduce their control over PSUs. Instances of insider trading of shares by them have also come to light. All this has led to low valuation or under pricing of equity.

Further, in many cases, disinvestment has not really changed the ownership of PSUs, as the government has retained a majority stake in them. There has been some apprehension that disinvestment of PSUs might result in the ‘crowding out’ of private corporates (through lowered subscription to their shares) from the primary capital market

An important fact that needs to be remembered in the context of divestment is that the equity in PSUs essentially belongs to the people. Thus, several independent commentators have maintained that in the absence of wider national consensus, a mere government decision to disinvest is not enough to carry out the sale of people’s assets. Inadequate information about PSUs has impeded free, competitive and efficient bidding of shares, and a free trading of those shares. Also, since the PSUs do not benefit monetarily from disinvestment, they have been reluctant to prepare and distribute prospectuses. This has in turn prevented the disinvestment process from being completely open and transparent.

Lastly, to the extent that the sale of government equity in PSUs is to the Indian private sector, there is no decline in national wealth. But the sale of such equity to foreign companies has far more serious implications relating to national wealth, control and power, particularly if the equity is sold below the ‘correct’ price.

If the disinvestment policy is to be in wider public interests, it is necessary to examine systematically, issues such as – the ‘correct’ valuation of shares, the ‘crowding out’ possibility, the appropriate use of disinvestment proceeds and the institutional and other prerequisites.

Disinvestment is generally expected to achieve a greater inflow of private capital and the use of private management practices in PSUs, as well as enable more effective monitoring of management discipline by the private shareholders. Such changes would lead to an increase in the operational efficiency and the market value of the PSUs. This in turn would enable the much needed revenue generation by the government and help reduce deficit financing.

However, to date the market experience has been otherwise. The large national budgetary deficit on revenue account has been increasing. The government has not used the disinvestment proceeds to finance expenditure on capital account; i.e. the disinvestment policy has resulted in capital consumption rather than generation. Administrative costs of the disinvestment process have also been unduly high.

The actual receipts through disinvestment have often fallen far short of their target. During the period 1991-92 to 2002-2003, the government had targeted the mobilization of about Rs. 78,300 crores through disinvestment, but it could actually mobilize only Rs. 30,917 crores

After a great deal of initial excitement and reservations, disinvestment of public sector enterprises has become an ongoing process in the country. But the debate continues, with some enthusiastically endorsing it and others expressing apprehensions and opposition. By and large, this debate has been at the ideological level. Ideology cannot be kept out of the debate, but disinvestment has other dimensions too. The modalities of disinvestment are important. So are its consequences.

One possibility is strategic sale with complete transfer of management to an enterprise in the private sector. Modern Food Industries, Bharat Aluminum Company Limited (BALCO), VSNL, Centaur Hotel Airport Mumbai and a few others were sold off in this manner.

A second procedure adopted was partial disinvestment whereby the government still retained effective control by holding 51 per cent or more of equity. This has been the procedure adopted in the majority of cases. This is not a simple procedure, though. A decision has to be made as to who would be eligible to acquire the shares – other enterprises, employees or the public at large – and the manner in which the shares are to be off-loaded.

Twelve years after it was started, the liberalization of the Indian economy remains an ideological and operational battleground. There is mainstream national consensus on the need and irreversibility of reforms, but widespread disagreement about its pace and the sharing of its benefits. A basic aspect of the withdrawal of the state from the economic sphere has been the disinvestment to private parties of the shares (and in some cases control) of public sector enterprises (PSUs) [or state-owned enterprises (SOEs)]. This has affected thousands of Indians, and triggered fierce political debates

Disinvestment, which has now become a universal trend, means transfer of ownership and/management of an enterprise from the public enterprise from an industry or sector to the private sector, partially or fully. Another dimension if disinvestment is opening up of an industry that has been reserved for the public sectors to the private sector.

Disinvestment is an inevitable historical reaction to the indiscriminate expansion of the state sector and the associated problems. Today even in communist countries disinvestments and privatization has become a vital measure of economic rejuvenation.

Disinvestment has its advantages in several ways. It would help reduce the fiscal burden of the state by relieving it of its losses and reducing the size of bureaucracy, enabling the government to mop up funds, better management of the enterprises, encourage entrepreneurship and help accelerate the pace of economic development as it attracts more resources from the private sector for development. It may increase the number of workers and common man who are shareholders and this could make enterprises subject to more public vigilance. Disinvestment also helps the government to concentrate more on the essential state functions.

Government may confront several obstacles to privatization and disinvestment. Trade unions and political parties may oppose it. In developing countries, the relatively undeveloped capital market sometimes makes it difficult for governments to sell shares. Another problem is that governments usually want to sell the least profitable enterprises, those that the private sector is not willing to buy at a price acceptable to the government.

Disinvestment will be successful only if certain conditions are satisfied. The policy should be very clear and there should be proper privatization strategies. Equally important are the commitment and political boldness on the part of the government.The following are the ways in which the procedure for disinvestments is generally carried out.

• Public offering: This maintained the state ownership on the company but diversified the shareholding among various entities.
• Internal restructuring: One of the most popular methods of restructuring, which maintained state ownership of assets. This process could involve the breaking up of the company in to smaller units producing different products or setting up of a new entity to just take over owner ship of productive assets. Debt equity swap is also part of the internal restructuring process.
• Bankruptcy and reorganization: Restructuring could also involve the bankrupt firms being dissolved.
• Employee shareholding: This has been one of the most popular forms of restructuring employed in China. Being a communist mindset where collective holding of assets was always emphasized, this form of restructuring was popular since the employees were not threatened with retrenchment and hence this was the most socially acceptable restructuring exercise at that point of time.
• Open sale: This form of restructuring has become more popular in recent years. The firm is openly sold to insiders or outsiders, perhaps through auction. This has been the most radical form of privatization because it can involve the transfer of the firm to a single private owner or a management group.
• Leases: Under this form of restructuring, the assets of a PSU were leased out. The assets were leased out to legal entities independent of the government or ex-employees who formed their own companies. Leasing is often adopted when the lessee has insufficient financial resources to buy the firm.
• Joint ventures: Formation of a joint venture or merger falls under this category of restructuring. This type of reform companies to obtain long-term access to capital and technology.

Objectives are statements of expected outputs; they should be defined before inputs are released, and they should be used by management to determine what inputs are to be used. Once established, an objective becomes a convenient measuring stick for judging (and then rewarding) managerial proficiency. Superior performance should no longer go without reward.

Goals are defined as being relatively few and long-term in their focus.  Objectives are defined as being relatively more numerous and short-term in their focus.  The most important thing to remember about objectives is that the critical few are the ones to concentrate on.  The critical few are the 20% of the objectives that will produce 80% of the results.  One of the biggest problems many organizations have with MBO is that they set too many objectives, especially too many trivial ones.  Set only those objectives that a unit or team can get their arms around—five to seven maximum—five is best.  Also, remember that objectives are working tools, not public-relations statements designed to impress people.  You cannot set effective objectives if you don’t have a “systematic way of exposing reality and acting on it.”

Strategic Planning and the Hierarchy of Objectives.

Strategic planning and the hierarchy of objectives are closely interwoven and are consequently discussed together (see Figure 1).Strategic Planning is concerned with overall concepts of the operation. It involves determining major objectives of the company as well as how to acquire and dispose of the resources necessary to achieve the objectives. In strategic planning, therefore, opportunities and external constraints are analyzed and matched with the internal strengths and limitations of the organization. In turn, this analysis is the basis of determining the hierarchy of objectives, especially the higher-level objectives. The fundamental purpose, the mission, the overall objectives as well as the more specific overall objectives are, to a large extent, determined by top management, with, of course, input from lower level managers. These objectives are then further broken down into divisional, departmental, unit, and individual objectives. The process of setting objectives, however, is not a one-way street.

This focus on the relationship of the organization to its environment has shown that inputs become very important for developing the strategic plan and the hierarchy of objectives. Now the thrust of the discussion is on the traditional and more specific aspects of: setting objectives, planning for action, implementing MBO, and control and appraisal.

2. Setting Objectives.

Objectives are set jointly by the superior and subordinate. In MBO, the emphasis is on verifiable objectives. That is, at the end of a period it can be determined if an objective has been achieved. Therefore, objectives should be stated, as clearly as possible, in terms of (a) quantity, (b) quality (c) time, and (d) cost. Objectives, then, should be measurable:

HIERACHY OF OBJECTIVES

i.e., contribute to objectives of the next higher organizational unit; focus on results rather than on activities; indicate performance and personal development; be challenging, yet reasonable; emphasize results, but not to the neglect of other important aspects of a job that cannot be quantified. It can be seen that it is not easy to set objectives that meet all, or even most, of these criteria. Yet, this effort is necessary to make MBO effective.

Organization Objective Setting.

This step requires the top managers of an organization to review the purpose for which the organization exists. In the military, this may require a review of the mission statement and a discussion of its meaning. This is an important requirement, for periodic review re-emphasizes the continuing need for the existence of the organization. With this mission in mind, the commander or supervisor and his staff must then set organizational objectives in areas where the unit will concentrate its efforts during the approaching objective-setting period. These objectives are

(1) To provide direction to the entire organization and

(2) To provide guidelines for subordinate-level managers to formulate their objectives. As a result of this organizational objective-setting step, Air Force managers should realize that a mission statement is a goal that defines the

does not define specific methods of accomplishing the goal stated. MBO helps formulate these specific methods that are necessary to accomplish the mission.

Manager Objective Setting.

Each individual manager (e.g., OIC, NCOIC) in the organization must now determine the objectives for his shop or office. This procedure takes place in three general steps: identifying key result areas, writing objectives, and negotiating with the boss. First, the manager must identify the key result areas of responsibility that are assigned to this unit.

In other words, just as the commander reviewed the whole organization in order to set organizational objectives, the manager reviews his part of the organization in order to set his objectives. It is important for the individual office or shop manager to identify the areas of his unit where most of the results are obtained. He will usually find that 20 percent of his area of responsibility will produce 80 percent of his results. It is important that he identify and zero in on these key result areas for MBO to be effective.

After a manager has identified his key areas of responsibility, he is ready to sit down and write his objectives. The main criteria that he should remember in writing objectives are that they should be specific, measurable, realistic, and results-oriented. They should be specific in that there can be no confusion about what is expected. They must be measurable for later accountability. They must be realistic but still challenging. The objectives should be results-oriented, concentrating on the output of the organization and not on its internal activities or procedures.

After the manager’s objectives have been written, he enters the participative management phase of this technique. The subordinate manager sits down with his boss and they agree on the subordinate’s objectives. This requires a realistic commitment on the part of both individuals. The agreement on the objective signifies the approval of the expected results (output) required of the subordinate. Progress toward these results can now be pursued by the subordinate until the requirement is reached or the goal is changed.

Objective Review.

After the setting of objectives has been agreed upon by the officer or NCO manager and his boss, the stage is set for managing by these objectives. This managing process is the responsibility of the subordinate manager, and it is interrupted only by mutually arranged, formal review sessions with the commander. In other words, MBO requires that each individual have the freedom to perform a well-defined task without interference.

There are two types of objective reviews—intermediate and final.⁶ The purpose of the intermediate review is to determine progress and identify problems that stand in the way of accomplishing objectives. Most problems are not foreseeable at the time objectives are written; they appear only when action is taken to accomplish the objectives. The result of this intermediate session should be either to agree on a plan that resolves the blockage of objective accomplishment or to change the objectives.

The final review is to determine objective accomplishment. In this session the subordinate’s objectives are reviewed for the entire period. In addition, the session concentrates on the renewal of the objective-setting cycle by establishing a basis from which to plan the objectives for the next period. The superior gains an additional benefit from this session since it provides him with inputs on which to evaluate the subordinate’s performance. If the focus of the session is on the objectives and it does not break down into personal recrimination of the individual, then the review will be a true appraisal of performance, not personality.

The term “Management by Objectives” was introduced & popularized by Peter Drucker who stated that, “Objectives are needed in every area were performance and results directly and vitally effects the survival of the business”. In addition, he emphasized the importance of participative goal settings, self-control & self-evaluation. But Ducker’s idea of MBO was not adopted in its entirety and MBO was not practiced as a way of managing. Rather, selected aspects were taken and applied to performance appraisal.

The Appraisal Approach.

McGregor called attention to the shortcomings of conventional appraisal programs, which focused mainly on personality traits. The manager, mistrusting the validity of the appraisal instrument, resisted because he did not like to judge other human beings like physical objects. Consequently, McGregor suggested anew appraisal format, utilizing Ducker’s MBO concepts. In this approach, the subordinate sets his short-term performance goals for himself. These goals are then discussed further with his superior. Later, the individual’s performance is evaluated against these goals, but it is primarily self-appraisal.

Integrating Objectives.

In the middle 1960’s, behavioral scientists became interested in the MBO philosophy. They saw MBO as a way of integrating individual and organizational objectives, in which the individual becomes an active participant in the managerial process. Moreover, the underlying premise is not that top management “knows best,” but rather, that individuals at all levels are capable of contributing to the success of the organization. Consequently, participation is a key aspect of this orientation.

Another characteristic of this MBO approach is the concern not only for organizational objectives, but also personal development objectives. It recognizes that learning does not stop at the time a diploma or degree is earned. Learning is a continuing process. Therefore, developmental and growth objectives re now an important part of the MBO process. Another facet that should be mentioned here is that people in organizations are better educated than ever before. Consequently, they do not want to accept orders blindly; they demand a part of the action; they want to be involved; they want more control over their job and their life; and they also want to know where the company is going, so that they can contribute to the aims of the organization. MBO, which stresses participation, was found to be a means to satisfy these needs. It was recognized that people want to do a good job and that the needs of the organization and the individual are not necessarily incongruent, and that they can be integrated. Therefore, both the individual and the organization can benefit from this approach to management.

The Long-Term View.

Although the new emphasis on the needs of individuals created a more favorable environment for managing, there were still some problems. One was that the focus was still primarily on short-term, one-year objectives. Unfortunately, this often resulted in undesirable consequences. For example, individuals, focusing on the one-year cycle, may neglect important decisions necessary for the long-term health of the organization. This points to the need to integrate long range and strategic plans with medium and short-range objectives.

The implication of the new orientation had a greater impact than might appear on the surface. Previously, MBO programs were primarily implemented by the personnel departments. It was not unusual to find the top management attitude that MBO is valuable, but only for middle and lower managers. The new orientation and the shift to a more comprehensive approach to MBO (relating it to long-range and strategic plans) demand the attention and involvement of top management. Their commitment has to go beyond the issuance of a policy statement endorsing MBO for the company. Instead, top executives must become active participants in the MBO process. Consequently, MBO welds together not only short-term goals with long-term aims; it also integrates the efforts of managers at all levels of the organization.

The Next Stage.

MBO has come a long way, from a performance appraisal tool to a device for integrating individual and organizational objectives, and finally to a long-range planning instrument. MBO has probably survived as an effective managerial approach because it has changed, grown, and developed. But the development must not stop now if MBO is to remain viable. I would like to introduce a new MBO model. To be sure, it builds on the effective concepts of earlier MBO approaches, but it adds at least two new dimensions:

(1) MBO is viewed as a system of managing in which many key managerial      activities are integrated; and

(2) Systems concepts are used to emphasize the interdependency of MBO with its environment.

A MODEL FOR A SYSTEMS APPROACH TO MBO – SAMBO

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INTRODUCTION

Many authorities on business management identify five functions of management: Planning, Organizing, Directing, Controlling, and Co-ordination. The planning and controlling functions often get less attention from owner-managers of small business and organizations than they should. One way to strengthen both of these functions is through effective goal setting.

Long range goals for sales, profits, competitive position, development of people, and industrial relations must be established. Then, goals are set for the current year, which will lead towards the accomplishment of the long-range goals.

Management by Objectives “MBO” includes goal setting by all managers and leaders down to the first level of supervision. Their goals are tied to those of the company or organization.

Traditionally, people have worked according to job descriptions that list the activities of the job. The Management by Objectives (MBO) approach, on the other hand, stresses results.

Let’s look at an example. Suppose that you have a credit manager and that his or her job description simply says that the credit manager supervises the credit operations of the company. The activities of the credit manager are then listed. Under MBO, the credit manager could have five or six goals covering important aspects of the work. One goal might be to increase credit sales enough to support a 15 percent increase in sales.

MBO looks for results, not activities. With MBO, you view the job in terms of what it should achieve. Activity is never the essential element. It is merely an intermediate step leading to the desired result. Management by Objectives may be used in all kinds of organizations. But not everyone has had the same degree of success in using this concept.

WHAT IS MBO?

Management by Objectives (MBO) was first outlined by Peter Drucker in 1954 in his book ‘The Practice of Management’.

Management by Objective (MBO) has been one of the most successful approaches to management to date. The fact that MBO has survived for about twenty years indicates that it is more than just a fashionable technique. What is often overlooked however is that MBO has changed considerably over the years. There are still some who think of MBO as an appraisal tool. But, if this narrow, limited view of MBO is taken, than MBO would indeed have serious limitations. On the other hand, if MBO become the way of managing many of the undesirable consequences encountered in appraisal can be avoided.

Management by objectives is about setting objectives yourself and then breaking these down into more specific goals or key results.

MBO is a systematic and organized approach that allows management to focus on achievable goals and to attain the best possible results from available resources. The principle behind MBO is to make sure that everybody within the organization has a clear understanding of the aims, or objectives, of that organization, as well as awareness of their own roles and responsibilities in achieving those aims. The complete MBO system is to get managers acting to implement and achieve their plans, which automatically achieve those of the organization.

MBO is a system of systematic planning of what needs to be executed in the short term to implement the most effective action to take advantage of opportunities and to achieve the goals of the sales department and of the organization.

So far we’ve learned that, in the right circumstances, the P/E ratio can help us determine whether a company is over- or under-valued. But P/E analysis is only valid in certain circumstances and it has its pitfalls. Some factors that can undermine the usefulness of the P/E ratio include: Accounting Earnings is an accounting figure that includes non-cash items. Furthermore, the guidelines for determining earnings are governed by accounting rules (GAAP) that change over time and are different in each country. To complicate matters, EPS can be twisted, prodded and squeezed into various numbers depending on how you do the books. The result is that we often don’t know whether we are comparing the same figures, or apples to oranges. Inflation In times of high inflation, inventory and depreciation costs tend to be understated because the replacement costs of goods and equipment rises with the general level of prices. Thus, P/E ratios tend to be lower during times of high inflation because the market sees earnings as artificially distorted upwards. As with all ratios, it’s more valuable to look at the P/E over time in order to determine the trend. Inflation makes this difficult, as past information is less useful today.

Many Interpretations A low P/E ratio does not necessarily mean that a company is undervalued. Rather, it could mean that the market believes the company is headed for trouble in the near future. Stocks that go down usually do so for a reason. It may be that a company has warned that earnings will come in lower than expected. This wouldn’t be reflected in a trailing P/E ratio until earnings are actually released, during which time the company might look undervalued.

Don’t Buy/Short Just Because of the P/E What goes up … well, sometimes it stays up for an awfully long time. A common mistake among beginning investors is the short selling of stocks because they have a high P/E ratio. If you aren’t familiar with short selling, it’s an investing technique by which an investor can make money when a shorted security falls in value. First of all, we believe that novice investors shouldn’t be shorting. Secondly, you can get into a lot of trouble by valuing stocks using only simple indicators such as the P/E ratio. Although a high P/E ratio could mean that a stock is overvalued, there is no guarantee that it will come back down anytime soon. On the flipside, even if a stock is undervalued, it could take years for the market to value it in the proper way. Security analysis requires a great deal more than understanding a few ratios. While the P/E is one part of the puzzle, it’s definitely not a crystal ball.

Conclusion

What have we learned about the P/E ratio? Although the P/E often doesn’t tell us much, it can be useful to compare the P/E of one company to another in the same industry, to the market in general, or to the company’s own historical P/E ratios.

Some points to remember:

• The P/E ratio is the current stock price of a company divided by its earnings per share (EPS).
• Variations exist using trailing EPS, forward EPS, or an average of the two.
• Historically, the average P/E ratio in the market has been around 15-25.
• Theoretically, a stock’s P/E tells us how much investors are willing to pay per dollar of earnings.
• A better interpretation of the P/E ratio is to see it as a reflection of the market’s optimism concerning a firm’s growth prospects.
• The P/E ratio is a much better indicator of a stock’s value than the market price alone.
• In general, it’s difficult to say whether a particular P/E is high or low without taking into account growth rates and the industry.
• Changes in accounting rules as well as differing EPS calculations can make analysis difficult.
• P/E ratios are generally lower during times of high inflation.
• There are many explanations as to why a company has a low P/E.
• Don’t base any buy or sell decision on the multiple alone.

Introduction

Chances are you’ve heard the term “P/E ratio” used before. When it comes to valuing stocks, the price/earnings ratio is one of the oldest and most frequently used metrics.

Although a simple indicator to calculate, the P/E is actually quite difficult to interpret. It can be extremely informative in some situations, while at other times it is next to meaningless. As a result, investors often misuse this term and place more value in the P/E than is warranted.

In this notes, we’ll introduce you to the P/E ratio and discuss how it can be used in security analysis and, perhaps more importantly, how it should not be used.

What is the P/E Ratio? P/E is short for the ratio of a company’s share price to its per-share earnings. As the name implies, to calculate the P/E you simply take the current stock price of a company and divide by its earnings per share (EPS):

P/E Ratio = Market Value per Share/Earnings per Share

Most of the time, the P/E is calculated using EPS from the last four quarters. This is also known as the trailing P/E. However, occasionally the EPS figure comes from estimated earnings expected over the next four quarters. This is known as the leading or projected P/E. A third variation that is also sometimes seen uses the EPS of the past two quarters and estimates of the next two quarters.

There isn’t a huge difference between these variations. But it is important to realize that, in the first calculation, you are using actual historical data. The other two calculations are based on analyst estimates that are not always perfect or precise. Companies that aren’t profitable, and consequently have a negative EPS, pose a challenge when it comes to calculating their P/E. Opinions vary on how to deal with this. Some say there is a negative P/E, others give a P/E of 0, while most just say the P/E doesn’t exist.

Historically, the average P/E ratio in the market has been around 15-25. This fluctuates significantly depending on economic conditions at the time. The P/E can also vary widely between different companies and industries.

Using the P/E Ratio Theoretically, a stock’s P/E tells us how much investors are willing to pay per dollar of earnings. For this reason it’s also called the “multiple” of a stock. In other words, a P/E ratio of 20 suggests that investors in the stock are willing to pay $20 for every $1 of earnings that the company generates. However, this is a far too simplistic way of viewing the P/E because it fails to take into account the company’s growth prospects. Growth of Earnings Although the EPS figure in the P/E is usually based on earnings from the last four quarters, the P/E is more than a measure of a company’s past performance. It also takes into account market expectations for the growth of a company. Remember, stock prices reflect what investors think a company will be worth. Future growth is already accounted for in the stock price. As a result, a better way of interpreting the P/E ratio is as a reflection of the market’s optimism concerning a company’s growth prospects.

If a company has a P/E higher than the market or industry average, this means the market is expecting big things over the next few months or years. A company with a high P/E ratio will eventually have to live up to the high rating by substantially increasing its earnings, or the stock price will need to drop.

A good example is Microsoft. Several years ago, when it was growing by leaps and bounds, its P/E ratio was over 100. Today, Microsoft is one of the largest companies in the world, so its revenues and earnings can’t maintain the same growth as before. The result is a current P/E ratio of 43 (at the time of writing, in June 2002). This reduction in the P/E ratio is a common occurrence as high growth startups solidify their reputations and turn into blue chips.

Cheap or Expensive? The P/E ratio is a much better indicator of the value of a stock than the market price alone. For example, all things being equal, a $10 stock with a P/E of 75 is much more “expensive” than a $100 stock with a P/E of 20. That being said, there are limits to this form of analysis — you can’t just compare the P/Es of two different companies to determine which is a better value.

It’s difficult to determine whether a particular P/E is high or low without taking into account two main factors:

Company growth rates - How fast has the company been growing in the past, and are these rates expected to increase or at least continue into the future? Something isn’t right if a company has only grown at 5% in the past and still has a stratospheric P/E. If projected growth rates don’t justify the P/E, then a stock might be overpriced. In this situation, all you have to do is calculate the P/E using projected EPS.

Industry - It is only useful to compare companies if they are in the same industry. For example, utilities typically have low multiples because they are low growth, stable industries. In contrast, the technology industry is characterized by phenomenal growth rates and constant change. Comparing a tech to a utility is useless. You should only compare high growth companies to others in the same industry, or to the industry average. You can find P/E ratios by industry on Yahoo Finance.

Financial accounting and management accounting are two interrelated facets of the accounting system. They are not independent of each other but they are interdependent. Financial accounting provides the basic data which are analysed and interpreted suitably and in the required manner by management accounting. Although there exists close relationships between financial accounting and management accounting, distinction is always drawn between financial accounting and management accounting since they differ in their emphasis and approaches.

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1. Modification of data: The management accounting system modifies the data furnished by financial accounting to serve the managerial needs in such a way that the process of classification and combination which enables to retain similarities without eliminating dissimilarities.
2. Validating the data: To make reliable decisions valid data should be made available to managers. The effectiveness of managerial function depends too much upon the accuracy and adequacy of the data. It is the function of management accounting to present before the management the required data with some sort of reasonable accuracy and it need not be with perfect accuracy.
3. Analysis and interpretation of data: Though management accounting is concerned with recording of business transactions, the analysis and interpretation of such data, in analyzing and interpreting the data lies the essence of management accounting. To discharge this function management accounting uses a number of tools like Marginal costing, budgeting, standard costing etc.
4. Communicating the data: The collected and interpreted data must be communicated to those who are interested in it or to whom it has some meaning. Otherwise these data may not yield any meaningful result and the whole process of collecting, validating and interpreting would amount to be a futile exercise. The communication of the data should be done within a reasonable time. Data delayed is decision delayed and a delayed decision may delay the prosperity of its concern. To accomplish this function of management accounting several reports and statements are being used.

Functions of a management accountant:

Although it is understood that all the functions of management accounting are to be performed by the management accountant, the following may be said to be the important role of the management accountant in the management of a company.

1. Collection of data: The management accountant has to collect data about the problems faced by the management through primary and secondary sources.
2. Analysis of data: After the collection of data, the management accountant has to analyse it for the purpose of interpretation using various tools and techniques.
3. Presentation of data: The management accountant is required to present the data to the management in columns and rows to facilitate proper understanding.
4. Planning: The management accountant assists the management in long range planning as well as in formulation of policies of the organisation.
5. Controlling: The management accountant follows different techniques like standard costing, budgetary control etc to ensure adequate control for implementation of plans and achievement of objectives.
6. Reporting: Reporting being a very important function of a management accountant, he has to prepare different types of reports periodically and communicated to the concerned departments to meet the requirements at different levels of management for necessary action.
7. Coordinating: The management accountant has to co-ordinate the various activities of the organization for the preparation of master budget and other such activities.
8. Decision making: The management accountant has to assist the management in taking realistic decisions through analysis and interpretation of data that suggests a particular course of action with the help of various tools of management accounting.

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