0 XP   0   0   0

Price to Earnings Ratio

Measures how much money you pay for each share for every 1 in earnings the company generates.

Indicates if the company’s shares are under or overvalued. 

How to use PE ratio

Penke

A PE ratio of 15 means the investor is paying $15 for every $1 in earnings.

  • Above 15 is considered overpriced but is hard to determine. Always compare the company to the  industry mean.
  • Can be very different between industries.
  • Can be used to compare companies.

Why do investors use PE ratio in their analysis

The PE ratio tells investors the current sentiment in the market for that company. As with every stock, the stock price never shows the real valuation of a company but rather how the market thinks how much the stock is worth. 

In other words, the current stock price also incorporates any future earnings or business opportunities in the future. The best example is the stock market crash in 2000. The PE ratio for any internet based company was going through the roof. Only based on the general assumption the internet and all associated businesses would thrive in the future. But this was based on nothing. A business still needs a good product or service to be able to survive. Instead, every investor bought any stock which did something related to the internet. Result: huge market crash.

Many investors were willing to pay premium prices and that was causing the PE ratio to rise. A high PE ratio is a warning sign that investors might be overvaluing a stock based on future earnings.

The three steps every investor should look at:

  • What is the current PE Ratio?
  • How does it compare to the industry?
  • What is the trend?

Things to be aware of

  • Only compare with other companies in the same industry.
  • Some industries might have very high or very low PE ratios in general.
  • PE ratios can be high for several years, it does not mean a sudden collapse is imminent.
  • Earnings growth is not included in the PE ratio.

How to calculate PE ratio

  • PE ratio = market value per share \ earnings per share (The market value per share is simply the current stock price. )

The PE ratio is a very commonly used ratio to determine the value of a company by comparing the current stock price relative to its earnings per share (EPS). Before we can calculate the PE ratio we need to know the EPS. EPS is calculated as follows:

  • EPS = (net profit - preferred dividends) \ end of period outstanding shares.
  • Net profit = revenue - expenses.
  • Outstanding shares can be found in the balance sheet.

The PE value helps investors to determine if the current stock price is under or overvalued. It also projects future growth.

In general, a higher PE ratio means that investors predict higher future growth. If the PE ratio is too high, then investors expect way too much future growth the company can never fulfil. This is most likely to happen in faster moving companies like tech companies or automobile companies like Tesla. These are hot and booming markets where investors expect much future growth driven by new technology (electric cars). When looking at the current MRQ (most recent quarter) PE ratio of Tesla ( jan. 2021) it's about 247 while the average in the industry is only 6. That might be a clue that Tesla is trading for way too high prices compared to their current assets and is more based on future growth.

Comments

Join the conversation.

Leave a comment

Stay informed with my latest content.

Subscribe to my newsletter and receive an email as soon as I add content to PenkeTrading.com.


By clicking Register, you agree to the General Terms and Conditions.
Penke's Market Notifications
PLBT.CC
now

I found you a Overbought RSI (Relative Strength Index) on the daily chart of PLBT.CC.

PLBT.CC Daily Candlestick Chart
OWC.CC
2 minutes ago

I found you a Death Cross on the daily chart of OWC.CC.

OWC.CC Daily Candlestick Chart
ORO.CC
3 minutes ago

I found you a Golden Cross on the daily chart of ORO.CC.

ORO.CC Daily Candlestick Chart
OIKOS.CC
4 minutes ago

I found you a STOCH Bullish Reversal Divergence on the daily chart of OIKOS.CC.

OIKOS.CC Daily Candlestick Chart
NSURE.CC
5 minutes ago

I found you a STOCH Bullish Reversal Divergence on the daily chart of NSURE.CC.

NSURE.CC Daily Candlestick Chart
NPXS.CC
5 minutes ago

I found you a MACD Bearish Reversal Divergence on the daily chart of NPXS.CC.

NPXS.CC Daily Candlestick Chart
NGM.CC
6 minutes ago

I found you a Oversold RSI (Relative Strength Index) on the daily chart of NGM.CC.

NGM.CC Daily Candlestick Chart
NGC.CC
6 minutes ago

I found you a Golden Cross on the daily chart of NGC.CC.

NGC.CC Daily Candlestick Chart
NEU.CC
6 minutes ago

I found you a Oversold RSI (Relative Strength Index) on the daily chart of NEU.CC.

NEU.CC Daily Candlestick Chart
NESTREE.CC
6 minutes ago

I found you a Golden Cross on the daily chart of NESTREE.CC.

NESTREE.CC Daily Candlestick Chart
DRMA.NASDAQ
8 minutes ago

I found you a RSI Bearish Reversal Divergence on the daily chart of DRMA.NASDAQ.

DRMA.NASDAQ Daily Candlestick Chart
MTR.CC
8 minutes ago

I found you a Golden Cross on the daily chart of MTR.CC.

MTR.CC Daily Candlestick Chart
MOV.CC
8 minutes ago

I found you a RSI Bullish Reversal Divergence on the daily chart of MOV.CC.

MOV.CC Daily Candlestick Chart
MM.CC
9 minutes ago

I found you a Overbought RSI (Relative Strength Index) on the daily chart of MM.CC.

MM.CC Daily Candlestick Chart
MBOX.CC
11 minutes ago

I found you a Death Cross on the daily chart of MBOX.CC.

MBOX.CC Daily Candlestick Chart
MBC.CC
11 minutes ago

I found you a STOCH Bearish Reversal Divergence on the daily chart of MBC.CC.

MBC.CC Daily Candlestick Chart
LDN.CC
16 minutes ago

I found you a STOCH Bearish Reversal Divergence on the daily chart of LDN.CC.

LDN.CC Daily Candlestick Chart
LBY.CC
16 minutes ago

I found you a STOCH Bullish Reversal Divergence on the daily chart of LBY.CC.

LBY.CC Daily Candlestick Chart
LBXC.CC
16 minutes ago

I found you a RSI Bullish Reversal Divergence on the daily chart of LBXC.CC.

LBXC.CC Daily Candlestick Chart
KURT.CC
17 minutes ago

I found you a STOCH Bullish Reversal Divergence on the daily chart of KURT.CC.

KURT.CC Daily Candlestick Chart
KDG.CC
18 minutes ago

I found you a Oversold RSI (Relative Strength Index) on the daily chart of KDG.CC.

KDG.CC Daily Candlestick Chart
IRD.CC
20 minutes ago

I found you a STOCH Bullish Reversal Divergence on the daily chart of IRD.CC.

IRD.CC Daily Candlestick Chart
IQN.CC
20 minutes ago

I found you a STOCH Bullish Reversal Divergence on the daily chart of IQN.CC.

IQN.CC Daily Candlestick Chart
IDH.CC
21 minutes ago

I found you a Death Cross on the daily chart of IDH.CC.

IDH.CC Daily Candlestick Chart