The term P/E is an accroym for ‘price to earning’ ratio. This ratio measures the individual shares price relative to the earning per share, (Also known as EPS). P/E ratios are used by investors and analysts to determine the relative value of a stocks , while also taking into account the stocks historical record.
It is KEY – to remember that , Companies that have no earnings or that are losing money do not have a P/E ratio since there is nothing to put in the denominator.
Investors review a companies P/E ratio when they try and determine if the share price is reasonable , & and if the price accuartly reflects the ‘Earnings Per Share’(EPS).
P/E ratio = market value per share
Earning per share
- To determine the P/E ratio one must divide the current stock price , by the Earnings per share (EPS) .
- How to find EPS ? *
EPS is calculated as a company’s profit , divided by the outstanding shares. The resulting number serves as an indicator of a company’s PROFITABILITY . The higher a company’s ‘EPS’ , the more profitable it is considered.
( EPS indicates how much money a company makes for each share of its stock and is a widely used metric for corporate profits. )
ONE LAST THING ;
Long Term P/E , ( p/e 10 vs p/e 30 ) .
Sometimes, analysts are interested in long term valuation trends and consider the P/E 10 or P/E 30 measures, which average the past 10 or past 30 years of earnings, respectively. FUTURE p/e Predictions are subject to change .
In general , a high P/E suggests that investors are expecting higher earnings. ( But a P/E that is too inflated can indicate a stock that is Over-evaluated , or should I say priced too high. ). A low P/E can indicate either that a company may currently be undervalued or that the company is doing exceptionally well relative to its past trends.
When a company has no earnings or is posting losses, in both cases P/E will be expressed as “N/A.” Though it is possible to calculate a negative P/E, this is not the common convention.
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