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Lord Onion | P/E ratio - and EPS? |
Can anyone give me an explanaition of these and what I should be looking for please... |
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Mr T
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P/E ratio is the price/earnings, it's calculated by dividing the earnings per share (EPS) by the price of the share. So a company that generated 14p a share and the share is worth 140 has a P/E of 10. Generally, big companies with little growth, say a high street bank like Barclays will have a lower P/E ratio than a highly speculative potentially huge start up company that currently makes little EPS but has potential, so the shares are priced high representing future expectations. At the height of the dot com bubble, many P/E ratios were off the scale like 400 to represent the future expectations. EPS is Earnings per share (EPS) andare the earnings returned on the initial investment amount.
From invetopedia.com: Earnings per share is generally considered to be the single most important variable in determining a share's price. It is also a major component of the price-to-earnings valuation ratio.
For example, assume that a company has a net income of $25 million. If the company paid out $1 million in preferred dividends and had 10 million shares for one half of the year and 15 million shares for the other half, the EPS would be $1.92 (24/12.5). First, the $1 million is deducted from the net income to get $24 million. Then a weighted average is taken to find the number of shares outstanding (0.5 x 10M+ 0.5 x 15M = 12.5M).
An important aspect of EPS that's often ignored is the capital that is required to generate the earnings (net income) in the calculation. Two companies could generate the same EPS number, but one could do so with less equity (investment) - that company would be more efficient at using its capital to generate income and, all other things being equal, would be a "better" company. Investors also need to be aware of earnings manipulation that will affect the quality of the earnings number. It is important not to rely on any one financial measure, but to use it in conjunction with statement analysis and other measures. |
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morlock825
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EPS is earnings per share. Let's say it's $1. If the stock trades at $10, then the P/E ratio (price to earnings) is 10.
Stock price= earnings X p/e ratio Hope that helps. |
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Del Piero 10
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http://www.equitymaster.com/detail.asp?date=9/2/2004&story=2 |
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franksprung
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P/E ranges from 0 to 100. You want it below 31 the lower the better some stocks sky rocket at 31. EPS ranges from 0% to 100%. You want it above 85% when you buy. |
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Piet Strydom
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EPS = Earnings per share, i.e. total income of the company/ no of shares.
P/E ratio = The Price per share/ EPS. This gives you an idea of how expensive a share is. (The higher ratio, the more expensive.) However, this number should not be seen in isolation, but be compared with other shares in the same industry. And then investigate the reasons for the deviation - don't just dive in on a low P/E.
However, people like Warren Buffet would recommend using a cash flow indicator, and even better, a proper detailed study. But WB is a fundamental investor, and has a company full of people analysing investment opportunities. |
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sindhukannankattil
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Earnings per share (EPS) measures the profit available to the equity shareholders on per share basis,that is the amount that they can get on every share held. EPS= Net profit after tax/number of ordinary shares outstanding. P/E ratio reflects the price currently being paid by the market for each rupee of currently reported EPS. P/E ratio= Market price of share /EPS. |
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gosh137
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JOiE is a bit mixed up.
Payout Ratio" is the ratio of dividends to earnings. It has nothing to do with number of shares outstanding or you own.
"In P/E ratio, EPS or Payout ratio, the higher the ratio, the better it is for the investor or shareholder..." NOT TRUE. A high P/E ratio shows a company is overvalued and ready for a fall. An example is, as a previous responder pointed out, during the dot com boom, some companies had P/E ratio of 400 and more. 7 years later, if they are still in business, most are selling at a fractions of their price. Over the last 50 years or so, the average P/E of the S&P 500 stocks has been about 15. So a lower payout ratio means the company may be undervalued and a good buy. A payout ratio thats too high is means more dividend money in your pocket, but if you are looking for total return (dividends plus company increasing in value or growth) it means the company is not spending very much to grow. Share price may not increase much. If the payout ratio was low in the past, and high now, with no increase in dividends, it means the companies earnings have dropped, and soom the share price may also. |
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palmerjeffrey
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The other answers have pointed out that P/E = Price/Earnings and EPS = Earnings Per Share.
But there are some detailed you should be aware of. There is more than one kind of P/E "TTM" (Trailing 12 months) or "forward" (Next 12 months).
The 2 different P/Es work like this: the TTM P/E (the one normally quoted in publications or in the news) takes the current price of the Stock (P) and divides it by the earnings per share (EPS) that the company earned over the last 4 quarters or trailing 12 months. Ironically this the the most common P/E quoted and when someone says just "P/E" this is the one they are normally talking about, however this P/E is rarely used by professional investors because it looks backwards.
Professional investors typically use the forward P/E ratio. Which is the same current stock price for P but the E in this case the the "expected" EPS of the company over the next 12 months.
Take Google for example. It closed at $471 per share yesterday (P). The company has earned $10.58 the last 12 months (EPS). Therefore its P/E (TTM) ratio is $471/$10.58 = 44.5. However the company is expected to earn $14.25 EPS over the next 12 months. This translates into a foward P/E of $471/$14.25=33.1. And it is this second P/E that should be used when comparing to other stock investments.
If you are wondering why the "forward" is used, it is because the past isn't as important as the future. For example assume ther are 2 companies that earned $1 the last 12 months. The first company is not expected to grow in the future but the second company is expected to grow 25% per year for the next 5 years. Should we value these companies the same? If we use the P/E TTM an investor might consider the 2 companies to be equal because their past performance is the same. But they are NOT equal, one has a brighter future and should be valued that way.
One last note of caution. P/E by itself almost meaningless in selecting an investment. No professional investor buys a stock simply because it has a low P/E. The future growth expectations must be factored in. Most profeesional investors consider a stock to be overvalued if its forward P/E is more the 2x its growth rate. For example if 5 year expected growth rate of a company is 15% they would consider it overvalued at a P/E above 30. For undervalued stocks they should have a PEG less than 1.0. For example a company that is expected to grow 15% but has a P/E of just 10 (P/E)/G would be 10/15 = 0.67.
One last bit of advice. Add the dividend yield to the growth rate in the PEG calculation. Individual investors incorrectly tend to ignore the Dividends when looking at PEG ratios. |
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J0iE
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Price Earnings ratio is basically the current Price of the Stock (usually quoted in the newspaper) divided by the company's Earnings per share...
An Earnings per share is the Net Income of the company, divided by the number of issued and outstanding stocks of the company...
you'll know your share of the company's Net Income by multiplying the number of shares you own by their EPS...
if you are after dividends, you must look out for their "Payout Ratio" meaning, dividends the company actually pays to its stockholders, this is computed by dividing the total dividends declared by the Board of Directors to be paid by the company over the number of the company's issued and outstanding shares...your expected dividends will then be the Payout Ratio multiplied by the shares you own..
In P/E ratio, EPS or Payout ratio, the higher the ratio, the better it is for the investor or shareholder... |
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