Friday, January 22, 2016

P/E ratio

P/E ratio means price of a stock of company divided by earnings per share (EPS).  It is the amount of money share holders want to pay for earning one dollar money. A good P/E ratio is between 15 to 25. Comparing P/E ratios of companies in same field is meaningful. S/W or technology companies may have higher P/E whereas old stable industries may have lower P/E value.

If it is more, it may mean either market is optimistic and thinks there is risk or there is no growth for the company or it may mean overvalued than it is worth. If it is less, then market is pessimistic about the the company or it may mean it is undervalued than it is worth in reality.

Price = Earnings * P/E ratio.
Stock price increases either because the real earnings increased or because the market perception caused the multiple (P/E) to increase.

If a company acquires other company with higher P/E, then it prefers cash purchase. If a company acquires other company with lower P/E, then it prefers to do stock purchase.

investopedia P/E
wikipedia P/E

No comments: