Price Earning P/E Ratio
Price earning ratio is known as P/E ratio or price to earnings ratio. By comparing the marketing price per share by earnings per share, this ratio used to calculate the market value of the stock relative to its earnings per share. By predicting the future price per share investors evaluate the fair market value of the stock.
The companies which have higher future earnings can issue the higher dividend, such type of companies have appreciating stock in the future.
Investors take help from PE ratio to analyze that, on the base of earning how much they need to pay for the stock. Due to this P/E ratio is called the price multiple or earning multiple. From this ratio investors decided, what multiple of earnings is the worth of a share.
Formula
The price-earnings ratio formula can be calculated by dividing the market value price per share bt the earnings per share.
Price-earnings ratio = Market value per share/Earnings per share
The financial statement is issued quarterly then this ratio used at the end of the quarter of the year. If financial statement issued on annual basis then it also calculated at the end of the year.
Analysis
For the indication of the expected price of the share on the base of the earnings of the share, price to earnings ratio is used. With the increment in the earning per share of the company, market value per share of the company increase. If the P/E ratio of the company is high then the company have good future performance because of which investors willing to pay more for the shares of the company.
If the ratio is low the company have poor current and future performance. Investors do not want to invest in such a company. because it is the poor investment.
For the comparison of the companies on the base of this ratio will be useful under the same industry.
Example
A corporation has earning per share for 1 year is 50 dollars. the stock trading is at 50 dollars a share of that corporation. P/E ratio for that corporation is calculated as
10 = 50/5
From the above ratio, it is clear that the corporation ratio is 10 times. So the investors willing to pay 10 dollars for each dollar of earning. So the trading of the corporation’ stock at multiple of 10.