P/E Ratio
P/E Ratio is the financial ratios most used by investor to make buy and sell decision. This is a ratio of current stock price to earnings per share for that company. This ratio appears simple but holds tons of information which investors can leverage.
P/E ratio is also called P/E multiple or just PE multiple. It is the ratio of current stock price to earning per share (EPS). All these calculations are based on per share basis.
What does P/E tell us?
P/E tells the investor the number of times a stock is trading compared to its earnings. Example P/E of 15 tells an investor that this stock is trading at 15 times its current earnings. So in essence the investors do see some future value in this company and are willing to pay 15 times its current earnings per share to buy this stock.
What P/E is good?
I have come across some folks who say that a P/E of 15 is considered average. I disagree with this. P/E will essentially tell us how much of a premium the investors are willing to pay today for the company’s stock based on their anticipated or future growth. So a higher P/E means that the share holders are optimistic of the company’s earnings, products and growth. This also means that the investors buying these stocks believe that the stock price will move up. The investors selling the stock believe that the price is too high, too optimistic and stock price will have to reduce to a lower multiple to its earnings. You have to compare P/E ratios of companies in the same business or sub sector. Say for example, in the current economy most of the investors are bullish (higher P/E) about healthcare sector while they are bearish (low P/E) on the transportation sector. So comparing P/E ratios of companies from a different sector won’t be apples to apples comparison. So to cut the long story short, you must compare P/E ratios of companies in the same sub sector. All other financial valuations considered equal (anything but reality), a company with a lower P/E is undervalued than a company from the same sub sector with a higher P/E.
Recession P/Es
Most or all the stocks have taken a beating during recession. In such a bear market which spans the entire stock market, P/E ratios of all the companies have fallen. This is the reason you must compare P/E ratios of companies in the same sector and also whenever possible companies having similar business models.
Types of P/E ratios
In calculating the P/E ratio, the P is the current share price but the E i.e. Earnings per Share (EPS) can be the most recent 12 month EPS i.e. trailing twelve months (TTM) (this is called the “Trailing P/E ratio”) or it can also be based on estimated EPS for the forward/ projected 12 month period (this is the normal P/E ratio)
Hope that helps!
P/E Ratio is the financial ratios most used by investor to make buy and sell decision. This is a ratio of current stock price to earnings per share for that company. This ratio appears simple but holds tons of information which investors can leverage.
P/E ratio is also called P/E multiple or just PE multiple. It is the ratio of current stock price to earning per share (EPS). All these calculations are based on per share basis.
What does P/E tell us?
P/E tells the investor the number of times a stock is trading compared to its earnings. Example P/E of 15 tells an investor that this stock is trading at 15 times its current earnings. So in essence the investors do see some future value in this company and are willing to pay 15 times its current earnings per share to buy this stock.
What P/E is good?
I have come across some folks who say that a P/E of 15 is considered average. I disagree with this. P/E will essentially tell us how much of a premium the investors are willing to pay today for the company’s stock based on their anticipated or future growth. So a higher P/E means that the share holders are optimistic of the company’s earnings, products and growth. This also means that the investors buying these stocks believe that the stock price will move up. The investors selling the stock believe that the price is too high, too optimistic and stock price will have to reduce to a lower multiple to its earnings. You have to compare P/E ratios of companies in the same business or sub sector. Say for example, in the current economy most of the investors are bullish (higher P/E) about healthcare sector while they are bearish (low P/E) on the transportation sector. So comparing P/E ratios of companies from a different sector won’t be apples to apples comparison. So to cut the long story short, you must compare P/E ratios of companies in the same sub sector. All other financial valuations considered equal (anything but reality), a company with a lower P/E is undervalued than a company from the same sub sector with a higher P/E.
Recession P/Es
Most or all the stocks have taken a beating during recession. In such a bear market which spans the entire stock market, P/E ratios of all the companies have fallen. This is the reason you must compare P/E ratios of companies in the same sector and also whenever possible companies having similar business models.
Types of P/E ratios
In calculating the P/E ratio, the P is the current share price but the E i.e. Earnings per Share (EPS) can be the most recent 12 month EPS i.e. trailing twelve months (TTM) (this is called the “Trailing P/E ratio”) or it can also be based on estimated EPS for the forward/ projected 12 month period (this is the normal P/E ratio)
Hope that helps!
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