Price Earning P/E Ratio
The price earning ratio is known as the P/E ratio or price to earnings ratio. By comparing the marketing price per share by earnings per share, this ratio is 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 higher dividends, such types of companies have appreciating stock in the future.
Investors take help from the PE ratio to analyze that, based on earning how much they need to pay for the stock. Due to this P/E ratio is called the price multiple or earnings multiple. From this ratio investors decided, what multiple of earnings is the worth of a share.
Formula to find Price Earnings ratio
The price-earnings ratio formula can be calculated by dividing the market value price per share by the earnings per share.
Price-earnings ratio = Market value per share/Earnings per share
The financial statement is issued quarterly then this ratio is used at the end of the quarter of the year. If a financial statement is issued on annual basis then it is also calculated at the end of the year.
Price Earning ratio Analysis and Interpretation
For the indication of the expected price of the share based on the earnings of the share, the price to earnings ratio is used. With the increment in the earning per share of the company, the 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 are 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 a poor investment.
The comparison of the companies based on this ratio will be useful under the same industry.
Example of Price Earning ratio
Understand this concept via this simple example of how to calculate the price per earning ratio. 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 are willing to pay 10 dollars for each dollar of earning. So the trading of the corporation’ stock at multiple of 10.
Do you want price to earnings ratio to be high or low? It is our advice that focus also on other financial ratios because by doing so you can extract better results.
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