Stock market 101: The PE ratio

Julie Brownlee, Fsp Invest, 23 Jun. 2015

Tags: pe ratio, price earnings ratio, what is the pe ratio, using the pe ratio, financial ratios

If you check the financial information of a listed company online or read market commentary, you’ve likely come across reference to the price earnings (PE) ratio.

So what is the PE ratio? And how should you use it?

Read on to find out…

What is the PE ratio?

The PE ratio is simply a company’s current share price divided by its current earnings per share (EPS). In other words…

PE ratio = Current share price / Current EPS

The PE ratio tells you the value of a company as a multiple of its after -tax profits, Money Week explains.

For example, if a company’s share price is 200c and its EPS is 20c, its PE ratio is 10 (200c/20c). Or ten times its current earnings.

In some instances, investors and analysts use a company’s forecast earnings to work out the PE ratio. This gives you the forward PE ratio. Other times, they use a company’s historical earnings to work it out. This is known as the trailing PE ratio.

These are both methods of valuing shares.

How to use the PE ratio

Broadly speaking, the higher a PE ratio, the more expensive a share is. You’ll tend to find companies with high PE ratios have fast growing profits.

Investors will pay a higher multiple of today’s earnings as they expect the company to continue growing rapidly and reward them for that.

When a PE ratio is low, it can suggest a company’s cheap. It can also infer that a company doesn’t have good growth prospects or its outlook is uncertain.

Investors will pay a lower multiple due to these reasons.

As with other financial ratios, you shouldn’t use the PE ratio alone to value shares.

When looking at the PE ratio of a company, it’s a good idea to compare it to the PE ratio of its sector and the broader market, along with its competitors.

So there you have it, the PE ratio.

*********** Best seller *************

Watch Every Presentation, Every Investment Idea!

If you’re interested in taking home a copy of everything Francois has to say about making BIG money from small stocks – order your copy of the Penny Stock Boot Camp DVD Box set now!


Related QA

willz asked:
Good day I see the share price of Hulamin has dropped continuously since November 2017. Apparently it is a very good buy. Why does the price keep on [read more]
Published at 10 Feb. 2018 in: Shares & Stock Ideas Share price 1 Answer
BrianD asked:
Can you please advise me what is all required to get set-up for CFD trading? – as per the adverts from Timon? I note the quarterly fee, but what [read more]
Published at 13 Dec. 2017 in: Shares & Stock Ideas Cfd 1 Answer
DRTANYA asked:
I received shares form NETCARE in 2006 and forgot about it and now I am not sure if it is still available or valid anymore - who can I mail or [read more]
Published at 04 Dec. 2017 in: Shares & Stock Ideas 1 Answer
While I have been following Francois suggestions on the Red ?Hot Penny Shares since February this year, I am still not certain how long I am meant to [read more]
Published at 29 Aug. 2017 in: Shares & Stock Ideas Buy Sell Hold 2 answers
nmaranele asked:
Good day, What would be the right amount to invest as a minimum for equities to see tangible results? [read more]
Published at 18 Aug. 2017 in: Shares & Stock Ideas Minimum invetsment 1 Answer




Youtube Twitter Facebook

Connect with us:    

  • Accelerated Investor
  • Accessories
  • Accountancy
  • Accountancy services