What is PE Ratio of a company ? How does it affect the company's share ?

Question

Is it a good share to invest if PE is high ? Or is it good when the Profit by Earnings ( PE ) ratio is low ? Any short term targeted stocks for recommendation ?

Answer 1

Price to earnings is the relationship between the stock's price and their annual earnings per share (EPS).

So a stock that earns $2/share and sells for $60 has a P/E of 30.

The theory is if a stock has a low P/E, then it might be undervalued and eventually the stock market will realize this and the stock's price will increase.

However, you must be careful. Some industries have low P/Es in general and some (like some internet companies used to) have very high P/E ratios. So not only would you want to consider the P/E of the stock itself, but also the companies within the sector too.


FYI, using P/E ratio is an "old" way to pick stocks used for generations since other data on companies were not as easily accessible. Nowadays, selecting stocks is a much more refined process where you might consider earnings, earnings growth, sales, sales growth, insider trading, as well as a number of other attributes.

You might consider picking up How to make money in Stocks in good times and bad by William O'Neill whose CANSLIM method is very well known.

That'll help you get a good basic understanding of what makes a successful stock successful!

Hope that helps!

Answer 2

RE:
What is PE Ratio of a company ? How does it affect the company's share ?
Is it a good share to invest if PE is high ? Or is it good when the Profit by Earnings ( PE ) ratio is low ? Any short term targeted stocks for recommendation ?

Answer 3

The P/E ratio (price-to-earnings ratio) of a stock (also called its "earnings multiple", or simply "multiple", "P/E", or "PE") is used to measure how cheap or expensive its share price is. The lower the P/E, the less you have to pay for the stock, relative to what you can expect to earn from it. It is a valuation ratio included in other financial ratios.

The price per share (numerator) is the market price of a single share of the stock. The earnings per share (denominator) is the net income of the company for the most recent 12 month period, divided by number of shares outstanding. The EPS used can also be the "diluted EPS" or the "comprehensive EPS"

For example, if stock A is trading at $24 and the Earnings Per Share for the most recent 12 month period is $3, then the P/E ratio is 24/3=8. Stock A said to have a P/E of 8 (or a multiple of 8). Put another way, you are paying $8 for every one dollar of earnings.

It is probably the single most consistent red flag to excessive optimism and over-investment. It also serves, regularly, as a marker of business problems and opportunities. By relating price and earnings per share for a company, one can analyze the market's valuation of a company's shares relative to the wealth the company is actually creating.

One reason to calculate P/Es is for investors to compare the value of stocks, one stock with another. If one stock has a P/E twice that of another stock, it is probably a less attractive investment. But comparisons between industries, between countries, and between time periods may be dangerous. To have faith in a comparison of P/E ratios, one should compare comparable stocks.

Determining share prices
Share prices in a publicly traded company are determined by market supply and demand, and thus depend upon the expectations of buyers and sellers. Among these are:

The company's future and recent performance;
New product lines;
Prospects for companies of this type, the "market sector";
Prevailing moods & fashions.
By dividing the price of one share in a company by the profits earned by the company per share, you arrive at the P/E ratio. If earnings move up in line with share prices (or vice versa) the ratio stays the same. But if stock prices gain in value and earnings remain the same or go down, the P/E rises. For example, if a stock price was $70 per share and it got $2 in earnings, the P/E is 35, historically high.

The price used to calculate a P/E ratio is usually the most recent price. The earnings figure used is the most recently available, but this figure is often a year old and does not necessarily reflect the current position of the company. Many times, you will hear this referred to as a trailing P/E, because it involves taking earnings from the last four quarters.

It is possible, however, to use the earnings estimate for the next four quarters. When doing so, the ratio is referred to as a projected, or forward, P/E.

Interpretation
The average U.S. equity P/E ratio from 1900 to 2005 is 14 (or 16, depending on whether the geometric mean or the arithmetic mean is used to average), meaning it takes about 14 years for a company you purchase to earn back your full purchase price for you.

Normally, stocks with high earning growth are traded at higher P/E values. Say, stock A may earn $6 per share the next year. Then the future P/E ratio is $24/6 = 4. So, you are paying $4 for every one dollar of earnings, which makes the stock more attractive than it was the previous year.

Various interpretations of a particular P/E ratio are possible, and the historical table below is just indicative and cannot be a guide, as current P/E ratios have, obviously, to be compared to current, inflation-corrected, interest rates:

Answer 4

It's Price / Earnings ratio. Take the stock price and divide the earnings per share. So, the higher the number, the greater distance between the price of one share of stock and the 'earnings' you can expect.

The higher the number, the higher the risk.

Answer 5

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Answer 8

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Answer 9

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Answer 10

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