Are small companies worth paying thirty seven times earnings for right now

Small companies trade at a median 37 times earnings, against 24 for large ones, a gap of 13 points. Price to book tells the same story, 5.5 against 3.6. The Reserve Bank raised the repo rate to 5.50 per cent on 7 October, so money has stopped getting cheaper.

Costlier money hits smaller firms in three ways. Loans reprice quickly, so borrowing eats into profit. Demand for consumer credit and capital goods slows after a few quarters. And when the ten year yield sits near 7.2 per cent, a stock at 37 times earns you only about 2.7 per cent, making distant profits worth less today.

Selection matters more than the asset class. Screen for a five year return on equity above 15 per cent and borrowings under half of net worth, because only a minority clear both. So spread your buying across several months, cap this bucket at a size a 30 per cent fall would not upset, and wait patiently.