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.

Advertisements

About SuperBenefitnews

Self-Managed Superannuation Service Providers in Australia. SuperBenefit will SET UP your SMSF and provide investment education for a better result. We take care of all your administration, accounting, ATO lodgement and audit of SMSFs, working with you and your advisors. If you want advice we can arrange one of our recommended advisors and accountants to meet with you, as we do not give advice, but take instruction only. Take control of your super, including property shares and other assets. Learn how to be your own advisor - make better decisions - by being mentored and coached to invest your own super wisely and strategically by qualified partners. Book to come to an event to find out more, or - Call us 0407 361 596, no obligation FREE strategy call.
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:

WordPress.com Logo

You are commenting using your WordPress.com 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 )

Google+ photo

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

Connecting to %s