What is the P/E Ratio? Description
The Price to Earnings ratio (P/E ratio) is a valuation ratio of a company's
current share price compared to its pershare earnings.
Discounted Cash Flow is a superior method to
value a company. However sometimes investors prefer to use simpler methods.
Calculation of P/E Ratio. Formula
The P/E ratio is used for measuring market performance and can be calculated
as:
P/E ratio calculation: Market Value per Share :
Earnings Per Share normally for a twelve month
period.
Often the P/E ratio is used, because it is so easy to grasp: If you buy
stock at a P/E ratio of 10, say, this means it will take 10 years for the
company's earnings to add up to your original investment  10 years before
you are paid back.
Example of Price to Earnings Ratio calculation
Take for example a company that earned $10M last year, and had given out
1 million shares in total. Earnings per share are $10. If that company's shares
currently sell for $100 per share, it has a P/E ratio of 10. Stated differently,
at this price, investors are willing to pay $10 for every $1 of last year's
earnings.
Limitations of the P/E Ratio
The Price to Earnings ratio assumes that the corporation will be worth
some multiple of its future earnings. This method has at least two drawbacks:
 It is based on reported earnings, "accounting profits", which are not
a good indicator of actual value creation for shareholders.
 What multiplier should be used? The industry average? Often corrections
are made based on: the expected growth of the company, the rate of return
on new capital and the costs of capital (WACC)
Book: Steven M.
Bragg  Business Ratios and Formulas : A Comprehensive Guide 
Book: Ciaran Walsh
 Key Management Ratios 

When is Stock Overbought and Oversold?
WHEN IS STOCK OVERBOUGHT?
"Overbought" refers to a condition in which the demand for a certain asset unjustifiably pushes the price of an underlying asset to rise to such a degree that it does not support the fundamentals. This is generally inte...






High PE Ratio Means What? A Good Stock?
What is the meaning if Company A has been trading at a higher PE ratio than company B?
Does it mean we should buy this stock or not?
Can anyone explain? Thanks......






What is the Beta of a Stock?
Before we're investing in a stock, we not only consider the P/E Ratio, but also the Beta of that particular stock.
Beta is the measurement of how volatile the stock is when compared to the index.
In a nutshell, it can be stated that if a st...






Conflict of Interest of Management Buy Out
If management is allowed to buy out the companies they work for, would it not be a conflict of interest in that the management can deliberately kill the P/E ratio before their acquisition?...






Why Using Average P/E Ratio is More Realistic
During favorable economic times (boom), company earnings are at record levels. As a result, the high stock prices and seemingly low P/E ratio's appear acceptable.
But investors are advised to use average earnings over the past 10 years or so to...








P/E Ratio Special Interest Group




P/E Ratio Education & Events




What are the Indicators of High Quality of Earnings?
The term quality of earnings usually refers to the degree of conservatism in a firm’s reported earnings. Indicators of high earnings quality in...
Usage (application): Analyzing Reported Earnings







What is the Degree of Management Discretion or Manipulation?
The discretionary nature of income recognition permits an examination of the degree of management manipulation of earnings under one or more of the fo...
Usage (application): Analyzing Reported Earnings









Financial Statement Analysis  Ratio Analysis
This presentation provides insights in Financial statement and ratio analysis, and includes the following sectios:
1. Financial analysis
2. ...
Usage (application): Ratio Analysis, Finanical Statement Analysis






Business Valuation  Company Valuation  Firm Valuation
This presentation elaborates on the valuation and analysis of companies and include the following sections:
1. Company analysis and stock selecti...
Usage (application): Business Analysis, Company Analysis  Firm Analysis






3 Minute Introduction to Financial Ratio Analysis: Why do it and What are the Main Types?
Why financial ratio analysis?
1. To compare the financial health of (similar) compani...
Usage (application): Types of Financial Ratios, Financial Ratio Analysis, Financial Ratio Types






P/E Ratio Diagram
Download and edit this 12manage PowerPoint graphic for limited personal, educational and business use.
Republishing in intranets, websites, books, ma...
Usage (application): Analyzing Stock Performance






News
P/e Ratio





News
P/e Limitations





Videos
P/e Ratio





Videos
P/e Limitations





Presentations
P/e Ratio





Presentations
P/e Limitations





More
P/e Ratio





More
P/e Limitations






Compare with the P/E Ratio: PEG Ratio
 Market Value Added 
EBIT 
EBITDA 
Economic Margin 
Return on Equity 
TSR 
PRVit
Return to Management Hub: Decisionmaking & Valuation  Finance & Investing
More Management Methods, Models and Theory



Special Interest Group Leader





