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. 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. Price to Earnings Ratio
To 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. 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. 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 - finance.yahoo.com
The price of Apple stock changes,
which means the price to earnings ratio
will continually change.
7. Price To Earnings Ratio
COMPANY EARNINGS PRICE PRICE PRICE #3 PRICE
SYMBOL PER SHARE #1 #2 #4
Apple: $5.72 $78.20 $115.23 $145.67 $190.55
AAPL
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. 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. 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. 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 http://en.wikipedia.org/wiki/P/E_ratio
