price earnings ratio

Examples of price earnings ratio in the following topics:

• Price/Earnings Ratio

  • Price to earnings ratio (market price per share / annual earnings per share) is used as a guide to the relative values of companies.
  • In stock trading, the price-to-earnings ratio of a share (also called its P/E, or simply "multiple") is the market price of that share divided by the annual earnings per share (EPS).
  • The price is in currency per share, while earnings are in currency per share per year, so the P/E ratio shows the number of years of earnings that would be required to pay back the purchase price, ignoring inflation, earnings growth, and the time value of money.
  • P/E ratio = Market price per share / Annual earnings per share
  • The horizontal axis shows the real price-earnings ratio of the S&P Composite Stock Price Index as computed in Irrational Exuberance (inflation adjusted price divided by the prior ten-year mean of inflation-adjusted earnings).

• Selected Financial Ratios and Analyses

  • Changes in financial ratios can impact a public company's stock price, depending on the effect the change has on the business.
  • A publicly traded company's stock price can also be a variable used in the computation of certain ratios, such as the price/earnings ratio.
  • The following are some examples of financial ratios that are used to analyze a company.
  • This ratio indicates the proportion of income that has been realized in cash.
  • As with quality of sales, high levels for this ratio are desirable.

• Market/Book Ratio

  • The price-to-book ratio is a financial ratio used to compare a company's current market price to its book value.
  • The price-to-book ratio, or P/B ratio, is a financial ratio used to compare a company's current market price to its book value.
  • It is also known as the market-to-book ratio and the price-to-equity ratio (which should not be confused with the price-to-earnings ratio), and its inverse is called the book-to-market ratio.
  • When intangible assets and goodwill are excluded, the ratio is often specified to be "price to tangible book value" or "price to tangible book".
  • Calculate the different types of price to book ratios for a company

• Understanding Future Stock Value

  • The main use of stock valuation is to predict future market prices and profit from price changes.
  • Once one has several EPS figures (historical and forecasts), the most common valuation technique used by analysts is the price to earnings ratio, or P/E.
  • It is better than just looking at a P/E because it takes three factors into account: the price, earnings, and earnings growth rates.
  • To compute the PEG ratio, divide the Forward P/E by the expected earnings growth rate (historical P/E and historical growth rate are also used to see where the stock has traded in the past).
  • The ratio is expressed as a percent and Return on Invested Capital ratio should have a percent that approximates the expected level of growth.

• Industry Comparisons

  • However, while ratios can be quite helpful in comparing companies within an industry and even across some similar industries, comparing ratios of companies across different industries may not be helpful and should be done with caution .
  • However, in terms of ratio analysis and comparing companies, it is most helpful to consider whether the companies being compared are comparable in the financial metrics being evaluated in the ratios.
  • Different businesses will have different ratios for different reasons.
  • To be useful, that statistic – whether earnings, cash flow, or some other measure – must bear a logical relationship to the market value observed; to be seen, in fact, as the driver of that market value.
  • The price to earnings ratio, for example, is a common multiple but can differ across companies that have different capital structures; this could make it difficult to compare this particular ratio across industries.

• Ratio Analysis and EPS

  • If shares in a company are traded in a financial market, the market price of the shares is used in certain financial ratios.
  • Values used in calculating financial ratios are taken from the balance sheet, income statement, statement of cash flows or (sometimes) the statement of retained earnings.
  • Times interest earned ratio (Interest Coverage Ratio): EBIT / Annual interest expense
  • Earnings per share (EPS) is the amount of earnings per each outstanding share of a company's stock.
  • Earnings per share for continuing operations and net income are more complicated in that any preferred dividends are removed from net income before calculating EPS.

• Setting the Target Payout Ratio

  • The Target Payout Ratio, or Dividend Payout Ratio, is the fraction of net income a firm pays to its stockholders in dividends.
  • The part of the earnings not paid to investors in the form of a dividend is left for investment to provide for future earnings growth.
  • However investors seeking capital growth may prefer lower payout ratios.
  • This is appealing to some investors because a lower dividend implies that more earnings are being reinvested in the company, which should cause the stock price to rise.
  • As they mature, they tend to return more of the earnings back to investors.

• Evaluating Financial Statements

  • Ratio analysis is a tool for evaluating financial statements but also relies on the numbers in the reported financial statements being put into order to be used as ratios for comparison over time or across companies.
  • With a few exceptions, such as ratios involving stock price, the majority of the data used in ratio analysis comes from the financial statements.
  • Ratios put this financial statement information in context.
  • In this way, earnings could be separated into normal or core earnings and transitory earnings with the idea that normal earnings are more permanent and hence more relevant for prediction and valuation.
  • In terms of adjustment of financial statements, analysts may adjust earnings numbers up or down when they suspect the reported data is inaccurate due to issues like earnings management.

• Dividend Payments and Earnings Retention

  • Retained earnings and losses are cumulative from year to year with losses offsetting earnings.
  • If the payment involves the issue of new shares, it is similar to a stock split in that it increases the total number of shares while lowering the price of each share without changing the market capitalization, or total value, of the shares held.
  • The part of the earnings not paid to investors is left for investment to provide for future earnings growth.
  • These retained earnings can be expressed in the retention ratio.
  • Retention ratio can be found by subtracting the dividend payout ratio from one, or by dividing retained earnings by net income.

• Dividend Yield Ratio

  • The dividend-price ratio is a company's annual dividend payments divided by market capitalization, or dividend per share divided by the price per share.
  • The dividend yield or the dividend-price ratio of a share is the company's total annual dividend payments divided by its market capitalization, or the dividend per share, divided by the price per share.
  • Its reciprocal is the Price/Dividend ratio.
  • The yield is the ratio of the annual dividend to the current market price, which will vary.
  • Instead, dividends paid to holders of common stock are set by management, usually with regard to the company's earnings.