Posted by: JavaBeans February 1, 2013
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Sure - my pleasure.
P/E ratio is a simple method to gauge the relative value of a stock (against another stock of a similar industry, etc.)
Best to work through an example:
Let's say Stock A has the following attributes with the earnings from the most recent fiscal year:
Market Cap = $40m
Annual earnings = $2m
P/E = $40 / $2 = 20
And Stock B has the following attributes:
Market Cap = $40m
Annual earnings = $20m
P/E = $40 / $20 = 2
So if you were an investor you'd want to pick Stock B because you'd pay only $40 million for a company that earns $20 million in profits versus Stock A which only earns $2 million for the same market price.
You can also calculate the P/E on a per share basis - you just have to divide each of the attribute by number of shares outstanding. Sometimes research reports will also use leading P/E which means the earnings are estimated into the future. In our case above it's a trailing P/E since we've used the earnings from the past.
P/E ratio is a simple method to gauge the relative value of a stock (against another stock of a similar industry, etc.)
Best to work through an example:
Let's say Stock A has the following attributes with the earnings from the most recent fiscal year:
Market Cap = $40m
Annual earnings = $2m
P/E = $40 / $2 = 20
And Stock B has the following attributes:
Market Cap = $40m
Annual earnings = $20m
P/E = $40 / $20 = 2
So if you were an investor you'd want to pick Stock B because you'd pay only $40 million for a company that earns $20 million in profits versus Stock A which only earns $2 million for the same market price.
You can also calculate the P/E on a per share basis - you just have to divide each of the attribute by number of shares outstanding. Sometimes research reports will also use leading P/E which means the earnings are estimated into the future. In our case above it's a trailing P/E since we've used the earnings from the past.