So a question came up yesterday in our Investing Club meeting about tools you can use to help you evaluate a stock you're potentially interested in as an investment. Someone asked about the P/E Ratio - or the Price-Earnings Ratio.
A brief definition of the P/E Ratio is that it is a way to value a company's current stock market price compared to its earnings per-share.
For example: If a company's current stock market share price is $50 per share and its earnings over the past 12 months was $2.00 per share (EPS based on outstanding stock), the P/E Ratio would be $25 ($50/$2.00).
Typically a higher number means that investors are expecting higher earnings growth in the future compared to companies with a lower P/E.
P/E is also sometimes referred to as the "multiple" because it indicates how much investors are willing to pay per dollar of earnings. So in our example above, it can be stated that an investor is willing to pay $25 for every $1.00 of earnings.
But there are some things to keep in mind when reviewing the P/E Ratio of a company. Investors should not look at the P/E ratio in isolation as the only means of deciding whether to invest in a stock. For instance, If a company is reporting a loss they will not be able to report a P/E Ratio.
Additionally, since the denominator of this ratio is based off the earnings of the company and companies can manipulate their levels of profitability, they can make the P/E look better than it potentially is. Investors should look at the underlying financial statements of a company to gain a better understanding of its profitability and its value.
Further, the above calculation is based on past data, so this ratio can be considered to be a "trailing" indicator (however, investors can use projected profitability to try to determine a projected P/E for a company).
Lastly, investors should also look at the P/E of a company and compare it to other similar companies in its industry and compare it to itself for prior like periods of time.
A brief definition of the P/E Ratio is that it is a way to value a company's current stock market price compared to its earnings per-share.
For example: If a company's current stock market share price is $50 per share and its earnings over the past 12 months was $2.00 per share (EPS based on outstanding stock), the P/E Ratio would be $25 ($50/$2.00).
Typically a higher number means that investors are expecting higher earnings growth in the future compared to companies with a lower P/E.
P/E is also sometimes referred to as the "multiple" because it indicates how much investors are willing to pay per dollar of earnings. So in our example above, it can be stated that an investor is willing to pay $25 for every $1.00 of earnings.
But there are some things to keep in mind when reviewing the P/E Ratio of a company. Investors should not look at the P/E ratio in isolation as the only means of deciding whether to invest in a stock. For instance, If a company is reporting a loss they will not be able to report a P/E Ratio.
Additionally, since the denominator of this ratio is based off the earnings of the company and companies can manipulate their levels of profitability, they can make the P/E look better than it potentially is. Investors should look at the underlying financial statements of a company to gain a better understanding of its profitability and its value.
Further, the above calculation is based on past data, so this ratio can be considered to be a "trailing" indicator (however, investors can use projected profitability to try to determine a projected P/E for a company).
Lastly, investors should also look at the P/E of a company and compare it to other similar companies in its industry and compare it to itself for prior like periods of time.