Price Earnings Ratio


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Price Earnings Ratio

  1. 1. Price to Earnings Ratio
  2. 2. Ratio Review: What is a ratio?  A relationship between two quantities, normally expressed as the quotient of one divided by the other: The ratio of 9 to 7 is written 9:7 or 9/7.
  3. 3. Stock Review Stock is ownership in a company. The price of the stock is constantly changing. Each year a company reports on how much it earns that year on a share of stock.
  4. 4. Price to Earnings RatioTo figure out the Price to Earnings Ratio, divide the price of a stock, by the earnings per share. Price of a stock Earnings per share
  5. 5. Computing P/E Ratios: 1st we need to know the price of the stock. 2nd we need to know the annual earnings per share. 3rd we divide the price of the stock by the earnings.
  6. 6. Example: Apple (AAPL) Researching on the Internet we can find the annual earnings per share of Apple. It was $5.72 in October of 2009.  Source - The price of Apple stock changes, which means the price to earnings ratio will continually change.
  7. 7. Price To Earnings RatioCOMPANY EARNINGS PRICE PRICE PRICE #3 PRICESYMBOL PER SHARE #1 #2 #4Apple: $5.72 $78.20 $115.23 $145.67 $190.55AAPL 78.20 ÷ 115.23 ÷ 145.67÷ 190.55 ÷ 5.72 5.72 5.72 5.72 = 13.67 = 20.15 =25.47 =33.31
  8. 8. What Else? What happens to the Price to Earnings Ratios if only:  The Stock Price Goes Higher?  The P/E ratio goes higher.  The Stock Price Goes Lower?  The P/E ratio goes lower.  The Earnings Go Higher?  The P/E ratio goes lower.  The Earnings Go Lower?  The P/E ratio goes higher.
  9. 9. Understanding the Ratio What does a high P/E ratio mean?  The stock price may be over-valued or the company is growing rapidly. What does a low P/E ratio mean?  The stock price may be under-valued or the company is in a mature industry.
  10. 10. Understanding the Ratio Would you buy a stock with a high or low P/E ratio?  “Stocks with higher forecast earnings growth will usually have a higher P/E, and those expected to have lower earnings growth will in most cases have a lower P/E.”  “Investors can use the P/E ratio to compare the value of stocks: if one stock has a P/E twice that of another stock, all things being equal (especially the earnings growth rate), it is a less attractive investment. Companies are rarely equal, however, and comparisons between industries, companies, and time periods may be misleading.”  – Source