MASTERCLASS Investment – What is PE – Price to Earnings Ratio and how does it help investors?

MASTERCLASS Investment – What is PE – Price to Earnings Ratio and how does it help investors?

What is PE – Price to Earnings Ratio and how does it help investors?

What is PEThe PE of a stock (Price to Earnings Ratio) is a measure (ratio – one figure divided by another) of a company’s current share price compared to its earnings per share known also by other names like “price multiple” or “earnings multiple”.
PE is known as the “multiple”, because it shows how much the market of investors are willing to pay for every dollar of earnings. For example, a company with a multiple (PE) of 16, means investors are willing to pay $16 for $1 of current earnings (profit, note often pre-tax earnings are used).

How PE is calculated:

(Share Price)  /  (Earnings per Share (EPS))

If a company is currently trading at $23 a share and earnings per share (EPS) over the last 12 months were $1.50 per share, the P/E ratio for the share would be 15.33 ($23/$1.50).
The EPS used is usually based on the last four quarters (trailing P/E), or sometimes it can also be based on the estimates of earnings expected in the next four quarters (projected or forward P/E). Another variation uses the sum of the last two actual quarters and the estimates of the next two quarters.

Understanding how the analyst calculates PE, or doing your own PE highlights the need for consistent method to ensure company PE comparisons are valid and reliable. Another aspect to watch – the denominator (EPS) is based on an accounting measure of earnings that can be manipulated, making the PE only as good as the quality of the underlying earnings number.

How does it help Investors?

Generally, a high PE suggests that investors are expecting higher earnings growth in the future compared to companies with a lower PE. Note, the P/E ratio doesn’t tell us the whole story. It’s usually more useful to compare the PE ratios of one company to other companies in the same industry or sector, to the market in general or against the company’s own historical PE. The PE should not be used as a basis for investment to compare the PE of a technology company (high PE) to a utility company (low PE) as each industry has much different growth prospects and business models

Interested to know what self-managed super (SMSF) is all about, and if it is for you? Book for a FREE seminar with bonuses – our next event brings ourselves and expert Uwe from Property Friends and covers Self-Managed Super Fund Roadmap (all you need to know) and The Theory on Property Investment – see SMSF and Property Seminar or call us 0407 361 596.


About SuperBenefitnews

Self-Managed Superannuation Service Providers in Australia. SuperBenefit provides a wholistic SMSF assistance, education and administration service continuum - 1. “assistance” is help of whatsoever nature where our overall SMSF experience and knowledge enables us to provide assistance/help without any legal (or “license”) limitations. 2. “education” involves providing knowledge through teaching, coaching and mentoring about all matters SMSF, including (but not limited to) investment issues such as equities and property, 3. “administration” encompasses all admin aspects of legally required SMSF trustee and member record keeping including (but not limited to) audit and ATO matters. In keeping with our key point that SuperBenefit does not provide Financial Advice, where issues arise from 1, 2, and/or 3 above Indicate a need for a legally authorized provider (such as a Financial Adviser) and the client does not have their own service provider, the client can utilize SuperBenefit’s ‘Connect Assist’ … SuperBenefit, in itself, does not provide Financial Advice, but it does provide the wherewithal for great SMSF service. WE do not provide Financial Advice or any other service that requires a legally authorized provider. However, where such advice or service is required we have our ‘Connect Assist’, a SuperBenefit resource we use to connect clients to a Licensed Advisor or other legally authorised service provider. Call us 0407 361 596, no obligation FREE Connection call to see how we can help you!
This entry was posted in Investing - Stock Fundamentals, Masterclass Investment. Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s